Question

Debra plans to invest $2,250 for 10 years. She can invest in a savings account that pays 4% simple intrest or a savings account that pays 4% intrest compounded annually. How much more money will she have at the end of 10 years if she chooses the account with compound interest?

Answer 1

Answer:

$\ 180.55$

Step-by-step explanation:

step 1

Simple interest

we know that

The simple interest formula is equal to

$A=P(1+rt)$

where

A is the Final Investment Value

P is the Principal amount of money to be invested

r is the rate of interest  

t is Number of Time Periods

in this problem we have

$t=10\ years\\ P=\ 2,250\\r=4\%=4/100=0.04$

substitute in the formula above

$A=2,250(1+0.04*10)$

$A=2,250(1.4)$

$A=\ 3,150$

step 2

Interest compounded annually

we know that    

The compound interest formula is equal to  

$A=P(1+\frac{r}{n})^{nt}$  

where  

A is the Final Investment Value  

P is the Principal amount of money to be invested  

r is the rate of interest  in decimal

t is Number of Time Periods  

n is the number of times interest is compounded per year

in this problem we have  

$t=10\ years\\ P=\ 2,250\\r=4\%=4/100=0.04\\n=1$

substitute in the formula above

$A=2,250(1+\frac{0.04}{1})^{1*10}$  

$A=2,250(1.04)^{10}$  

$A=\ 3,330.55$

step 3

Find the differences between the two final amounts

$A=\ 3,330.55-\ 3,150=\ 180.55$