Question

A man invests $8 000 at 12% simple interest for 3 years. If he invests the same amount of money for the same time period at 12% compound interest, what is the difference between the two investments?

Answer 1

Answer:

  $359.42

Step-by-step explanation:

The difference in the investment values can be computed by making use of the formulas for the account balance in each case.

  compound interest: A = P(1 +r)^t . . . . interest at rate r compounded annually

  simple interst: A = P(1 +rt) . . . . simple interest at rate r

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The account earning simple interest will have a balance of ...

  A = $8000(1 +0.12×3) = $10,880

The account earning compound interest will have a balance of ...

  A = $8000(1 +0.12)^3 ≈ $11,239.42

The difference between the two investments is ...

  $11,239.42 -10,880 = $359.42