Question

Joe Plumber has borrowed $5,000,000 to start his “Jack of All Trades Handyman” business for 5 years at 10% per year compounded interest. Joe will make no payments until the loan is due. How much should Joe expect to pay for principal and interest at the end of the five years? How much must he pay for total interest over this period?

Answer 1

Compound interest formula:

Where,
A = Amount at the end of the period (i.e Principal + Interest)
P = Principal amount borrowed
i = rate of interest in decimal form (i.e 10% = 0.10)
n = number of years

Therefore,

Therefore, Joe should pay $805,255.00 for principal and interest at the end of five years.

To find the total interest, we just have to subtract the principal amount borrowed from the total amount. Therefore,

Total interest paid = Total amount paid - Principal amount borrowed

=$805,255 - $500,000

= $305,255