Question

Lila plans to open an account with a deposit of $12,000. She plans to invest the money for 8 years in one of the following accounts:

An account that pays an annual simple interest of 7.5%, or
An account that pays 6% interest compounded annually.
If Lila invests in the account that will earn her more interest over these 8 years, how much interest will she earn?

Answer 1

9514 1404 393

Answer:

$7200

Explanation:

The amount of simple interest can be found from ...

I = Prt . . . . . . . where principal P is invested at annual rate r for t years

__

The amount of compound interest can be found from ...

I = P((1 +r)^t -1) . . . . . same variable definitions

__

The amount of simple interest earned is ...

I = 12000·0.075·8 = 7200

The amount of compound interest earned is ...

I = 12000(1.06^8 -1) ≈ 7126.18

In this scenario, the simple interest account earns more interest. If Lila chooses that one, the amount of interest earned is $7200.