Tim wants to invest some money that his grandmother gave him. He has $2000 and can put it in an account with simple interest or an account with compound interest. Homework Help ✎
The simple interest account is for 5 years with an interest rate of 10%. Use the formula I = P · rt to find the interest he earned at the end of five years. How can you use the interest to calculate the total amount in the account at the end of 5 years? What is the total?
The compound interest account is also for 5 years (compounded yearly) at an interest rate of 8%. Find the total in the account (A) using the formula A = P(1 + r)t. What is the total?
Which account is a better investment?
Add the interest he earns to his initial principal to find the total amount he would have after 5 years.
I = ($2000)(.1)(5 years)
I = $1000
Total = $2000 + $1000 = $3000
A = 2000(1 + 0.8)5
(1.08)5 = 1.469
A = $2000 (1.469) = $2938.66
Which account has more money after 5 years?