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Home > MC2 > Chapter 11 > Lesson 11.2.4 > Problem 11-74

11-74.
  1. 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 ✎

    1. 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?

    2. 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?

    3. 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?