In one part of the interview, this is a solution:
The interviewee should be able to estimate the fact that $100*(1 + 20%)^5 is something like $250 off the cuff. Without compounding, it’s obviously $200 exactly, so the answer “something a bit more than $200” is good. Many people answer $200 exactly and, when prompted “is it more or less than $200” choose “less”, which is clearly madness.
1) How should I be able to estimate that this is 250$?
2) If I estimate in that the worth in 5 years will be 100$ + 5*20%(100$), how should I know if it the number should be higher or lower than 200$?
3) In this case, would you do the whole math or simplify it?
Hi Antonello, does this formula work for any number of years and growth percentage ? Thanks a lot.
Hi Amandine, yes it is the best quick approximation for any number. The more little are the numbers the more accurate is this formula.
Hi Antonello, can you please clarify again how you got the three terms that you use to approximate (1 + 20%)^5? Just tell me how you calculate the first one for example
Hi David, it's a classical Math formula. You can find here the theorem: https://en.wikipedia.org/wiki/Binomial_theorem
Good use of Binomial Theorem