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Here's a shmoopy question for you...

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Young Warren Buffet deposited $1,200 into his new bank account. He earns 4% simple interest.

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A psychic told him recently he was going to be a rich man someday,

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so he's hoping this new bank account will mean, big, big money for him.

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Like... maybe even TWO thousand dollars.

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How much interest will he have earned in three years?

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Here are the potential answers...

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OK so this question is asking about very basic interest calculations...

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...in this case we have SIMPLE interest which means that the rate is compounded at the end

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of the year and returned to its owner to be spent on... hair growth formula... or whatever.

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Simple makes life much... simpler.

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So we have 3 iterations we have to do if we want to use the brute force method...

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First we take 1200 and multiply it by 1.04

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Note the zero in there -- it's 4% interest, not 40

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So 1200 times 1.04 gives you 1248.

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That's how much is in there after the first year -- 48 bucks in interest income for doing...

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a whole lotta nothing.

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No wonder the rich get richer.

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Since the interest is simple, we just multiply that simple interest number by 3 and we get

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3 times 48, or 144.

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1200 plus 144 is 1344 and voila -- the answer is C.

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But quick gut check for advanced students -- what if the interest had been retained

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in the bank account and NOT spent on hair growth formula?

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Do the computation again for year 2 and we have 1248 times 1.04 and that gives us 1298, roughly.

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Now we do it a third time... 1298 times 1.04 is approximately 1350.

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Interestingly, it's a fair $6 BETTER than the simple interest formula -- that

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is, by leaving the money in the bank, we made $6 more in interest.

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Yeah, it's a latte today, but it adds up.

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And if we'd been given this keep-the-money-in-the-bank question to resolve after, say, 27 years of compounding.

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...we'd take the entire exam time doing it by this brute force method... so we need

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another system -- a simple...ish formula.

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We could have gotten the same answer by multiplying the 1200 times the

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quantity (1+.04) to the 3rd power.

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That is, we'd calculated 1.04 to the 3rd, then multiply

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that number by the initial $1200 principal.

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Muuuuch easier when many years are involved.

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Oh the wealth a whole lot of sitting around on your duff can create.

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