Question

Adams Jackson invests $40,600 at 10% annual interest, leaving the money invested without withdrawing any of the interest for 10 years. At the end of the 10 years, Adams withdraws the accumulated amount of money.
Required:
a. Compute the amount Alan would withdraw assuming the investment earns simple interest.
b. Compute the amount Alan would withdraw assuming the investment earns interest compounded annually.
c. Compute the amount Alan would withdraw assuming the investment earns interest compounded semiannually.

Answer 1

Explanation:

The computation is as follows

a. Total withdrawn amount

= Principal amount + total interest earned

where,

Principal amount = $40,600

And, the total interest earned is

= $40,600 × 10% × 10 years

= $40,600

So, the total withdrawn amount is

= $40,600 + $40,600

= $81,200

b. Now total withdrawn amount in case of compounded annually

= Principal amount × (1 + interest rate)^number of years

= $40,600 × (1 + 0.10)^10

= $40,600 × 2.5937424601

= $105,305.94

c. Now total withdrawn amount in case of compounded semi annually

= Principal amount × (1 + interest rate)^number of years

= $40,600 × (1 + 0.05)^20

= $40,600 × 2.6532977051

= $107,723.89