A sum of $3310 is to be paid back in 3 equal installments. How much is

why arent we supposed to apply ci formula here? when i substitute for the formula i got a different answer(total amount=3310*(1+0.1)^3=4405.6; interest to be paid= 1095.6).
Bunuel could u please help me here understand where i have gone wrong

Hi vineeth89,

There are a few aspects to this interest question that make it tougher than most interest questions:

1) You are asked to make a periodic payment that will LOWER the remaining balance before the next round of interest is added.
2) The standard interest rate formulas that you know won't work here (you can't just plug in numbers and get an answer).
3) You are NOT told that the payment is made at the end of each year (without that information, the answer could conceivably be different). The Official GMAT would have included that information.

I'm going to assume that each payment is made at the end of each year (AFTER the interest has been added).

Since the answer choices are numbers, we can TEST THE ANSWERS though. Here's how:

Since the total is $3310 and we'll be dealing with 10% annual interest, chances are that the 3 equal payments will all have to be a bit higher than $1100. I'm going to TEST $1311.....

Starting Balance = $3310
Year 1 Interest = 10%(3310) = +331
Year 1 Total = 3641
Year 1 Payment = -$1311
Balance = $2330

Year 2 Balance = $2330
Year 2 Interest = 10%(2330) = +233
Year 2 Total = $2563
Year 2 Payment = -$1311
Balance = $1252

Year 3 Balance = $1252
Year 3 Interest = 10%(1252) = 125.2
Year 3 Total = $1377.2
Year 3 Payment = -$1311
Balance = $66.2

At the end of 3 years, we still have a little bit left, which means we haven't paid enough with each payment. The increase to the payment would not be much though, so the correct answer MUST be a little greater than $1311....

Final Answer:

GMAT assassins aren't born, they're made,
Rich

While the above method is the correct one, in my opinion it is bit tedious to do the calculations by hand, at least for me.
To get an approximate value you can do the following:
Find the total amount with interest compounding over 2 years:
A=3310*(1+0.10)^2=4005.1
Now each installment is roughly A/3=4005.1/3=1335.03 which is close to the final answer 1331.

Since we are taking the interest on the whole 3310 even in the second year and we don't consider the little bit interest in the 3rd year, I find that the answer I get through this is always slightly more than the actual answer. But still, unless the answer choices are really close, you can save some time through this method.

Big agree here. This calculation will already take close to 2 minutes with the "shortcut" method

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