Question

E) Natasha's parents want to support Natasha by saving $5000 for her college. They searched up for some investment options and came up with two best ones o 4.8% simple interest for 2 years o 4.1 % / year compounded semi- annually for 2 years Compare both the plans and find out which is the best to choose

Answer 1

Amount she would have in 2 years at a simple interest of is

$5000 + ($5000 x 0.048 x 2) = $5480

Amount she would have in 2 years at a 4.1 % / year compounded semi- annually is :

$5000 x ( 1 +0.041/2)^4 = $5422.78

the first option yields a higher value in two years when compared with the second option. Thus, the first option is the best one to choose

Explanation:

Future value with simple interest = principal + interest

Interest = principal x interest rate x time

0.048 x 5000 x 2 = 480

future value = $480 + 5000 = $5480

The formula for calculating future value with compounding:

FV = P (1 + r)^nm

FV = Future value

P = Present value

R = interest rate

m = number of compounding

N = number of years

5000 x ( 1 + 0.041 / 2)^(2 x 2) = $5422.78