Question

Melanie invests $4,000 into an account offering 4% interest compounded annually. Gina invests $4,000 into a simple interest savings account offering a 4.5% interest rate. What is the dollar amount of the greater balance at the end of five years?

Answer 1

Answer:

$4,900 (From simple interest method)

Explanation:

Given:

Amount invested (p) = $4,000

Interest rate for simple interest (r) = 4.5% = 4.5/100 = 0.045

Interest rate for Compound interest (i) = 4%

Number of year (t) = 5

Computation of amount from simple interest method:

Amount = p(1+rt)

Amount = $4,000[1+(0.045 × 5)]

Amount = $4,000[1+0.225]

Amount = $4,000[1.225]

Amount (from simple interest method) = $4,900

Computation of amount from compound interest method:

$Amount = p(1+i)^t\\\\Amount = 4,000(1+0.04)^5\\\\Amount = 4,000(1.04)^5\\\\Amount = 4,000(1.2166529)\\\\Amount = 4,866.616$

Therefore, Amount from simple interest method is higher .