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A person invested ₹P in a scheme that offers 19.8% interest, compounded annually for two years and two days. If the amount received from this scheme is reinvested at the same rate for the same period in the same scheme, then he will receive ₹792 as interest. Find the approximate value of P.

1. 2500
2. 1250
3. 1450
4. 1320

Correct answer: 1250

Solution

For 2 years and 2 days, the amount factor is (1+0.198)^2 plus 2 days simple interest on the 2-year amount. The effective growth per cycle is about 1.435, so the second cycle interest of ₹792 implies the first cycle amount is about ₹1250. Solving with the exact compound-interest expression gives P approximately ₹1250.

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