This question is quite easy, but it appears difficult if we focus too much on the formula, and the fact that it is difficult to execute 1.01^5 without a calculator. Beware of "formula tunnel vision": instead of worrying about how to calculate the answer using the interest formula, we should instead understand that a 1 percent increase is really quite easy to calculate by hand (just remove the final two digits of the original number, and then add it to the original number):
Year 1: 25,000 + 1% = 25,000 + 250 = 25,250
Year 2: 25,250 + 1% = 25,250 + 252 = 25,502
Year 3: 25,502 + 1% = 25,502 + 255 = 25,757
Year 4: 25,757 + 1% = 25,757 + 257 = 26,014
Year 5: 26,014 + 1% = 26,014 + 260 =
26,274Thus the answer is closest to
Choice A (26,000).
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My name is Brian McElroy, founder of McElroy Tutoring (http://www.mcelroytutoring.com). I'm a 41 year-old Providence, RI native, and I live with my wife, our three daughters, and our two dogs in beautiful Colorado Springs, Colorado. Ever since graduating from Harvard with honors in the spring of 2002, I’ve worked as a private test-prep tutor, essay editor, author, and admissions consultant.
I’ve taken the real GMAT 6 times—including the GMAT online—and have scored in the 700s each time, with personal bests of 770/800 composite, Quant 50/51, Verbal 48/51, IR 8 (2 times) and AWA 6 (4 times), with 3 consecutive 99% scores on Verbal. More importantly, however, I’ve coached hundreds of aspiring business school students to significantly better GMAT scores over the last two decades, including scores of as high as 720 (94%), 740 (97%), 760 (99%), 770, 780, and even the elusive perfect 800, with an average score improvement of over 120 points.
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