Question

You construct a budget to determine how much money you will need to start your own catering business. You take your savings of $15000 and hope to invest this money for 5 years. You have two investment opportunities for your money you can either invest it into an account that pays you simple interest at 5% or you can choose an account that pays 3.9% compounded monthly.

Answer 1

Compound interest is the best.

Explanation:

Simple interest is that which is not added to the initial capital once the term of the investment or credit has expired.

Compound interest is that which is added to the initial capital at the end of the investment or credit.

Simple interest:

I= C x i x t

15,000 * 0.05 * 5 = $ 750

Compound interest:

Cf= Ci (1+i)ᵗ

Cf = 15,000 * (1.039)^5 = $ 18,162.22

So, if Cf - Ci = I -> 3,162.22 is the compound interest.