Investment Analysis: Continuous Compound Interest

a. What is the formula for A'(P)? b. How can we find and interpret A'(5000)? c. How do we compare the approximation to the actual change?

a. Formula for A'(P)

To find the formula for A'(P), we need to differentiate the continuous compound interest formula A(P) = Pe^(0.04*12). Using the chain rule of differentiation, we differentiate A(P) with respect to P: A'(P) = e^(0.04*12) + P(0.04*12)e^(0.04*12) Simplifying the expression, we get: A'(P) = e^(0.48) + 0.48Pe^(0.48)

b. Finding and Interpreting A'(5000)

By substituting P = 5000 into the formula for A'(P), we can find A'(5000): A'(5000) = e^(0.48) + 0.48(5000)e^(0.48) Calculating the value, we get A'(5000) ≈ 1.62. This means that for every $1 increase in the principal amount of $5000, the total balance will increase by approximately $1.62.

c. Comparing Approximation to Actual Change

To compare the approximation to the actual change, we calculate the difference between A(5001) and A(5000): A(5001) - A(5000) = 5001e^(0.04*12) - 5000e^(0.04*12) Calculating the value, we find A(5001) - A(5000) ≈ $20.41. Therefore, the approximation of the actual change is $20.41.

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