Question

April received $1,800 from her grandmother as a birthday gift. She decided to put the money in an account to save for college. If the account earns 5% interest, compounded annually, how much money will be in the account after 5 years?
A. $2,408.81
B. $2,187.91
C. $2,297.31
D. $26,447.91

Answer 1

Answer: C

Step-by-step explanation:

Alright, first let’s review what compound interest is. Instead of simple interest which pays interest on the principal, it pays interest on the amount in the bank each year, so it basically pays interest on the principal with previous interest. Lets run this example through the years:

Year 1:

= $1800 + 5% (Of 1800)

= $1800 + $90

= $1890

Year 2:

= $1890 + 5% (of 1890)

= $1890 + $94.5

= $1984.50

Year 3:

= $1984.50 + 5% (of 1984.50)

= $1984.50 + $99.23 (I rounded it to the nearest hundredth from its original state, $99.225)

= $2083.73

Year 4:

= $2083.73 + 5% (of 2083.725)

= $2083.73+ $104.19 (I rounded it to the nearest hundredth from its original state, $104.1865)

= $2187.92

Year 5:

= $2187.92 + 5% (of $2187.92)

= $2187.92 + $109.40 (rounded to the nearest hundredth from 109.396)

= $2297.32

This is as close as you can get to answer C, it’s just off one cent because of all the rounding!