Beatrice invests $1,450 in an account that pays 4 percent simple interest. How much more could...

Question:

Beatrice invests $1,450 in an account that pays 4 percent simple interest. How much more could she have earned over a 5-year period if the interest had compounded annually?

a) $35.16

b) $24.15

c) $20.32

d) $28.12

e) $120.73

Present value

Present value refers to the estimated equivalent present amount of the sum of the money in the future by discounting based on the stated interest rate.

Answer and Explanation:

The following formula can be used to calculate the difference of the interest earned.

{eq}Interest~earned=\bigg[PV*(1+k)^{n}\bigg]-\bigg[(PV*r*n)+PV\bigg]\\ whereas:\\ PV=present~value\\ r=simple~interest~rate\\ n=number~of~periods\\ k=compounded~interest~rate\\ {/eq}

{eq}\begin{align*} Interest~earned&=\bigg[1,450*(1+.05)^{5}\bigg]-\bigg[(1,450*.04*5)+1,450\bigg]\\ &=(1,450*1.216653)-(290+1,740)\\ &=1,764.15-1,740\\ &=24.15 \end{align*} {/eq}

Beatrice would earned an extra B. $24.15 if she invested it in an accounts which compound annually


Learn more about this topic:

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How to Calculate Present Value of an Investment: Formula & Examples

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 15
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