Question

You are starting a savings account for college. You put $1,000 in as your starting balance. You earn simple interest at 10% every year. You also must pay 30% income tax on the interest earned annually. Calculate the balance for the account after 5 years

Answer 1

$1,350

Explanation:

Simple interest formula

I = Prt

where:

• I = interest
• P = principal
• r = interest rate (in decimal form)
• t = time (in years)

Given:

• P = $1,000
• r = 10% = 0.1
• t = 5 years

⇒ Total interest earned = 1000 × 0.1 × 5 = $500

If you have to pay 30% income tax on the interest earned annually, then you will keep 70% of your earned interest.

⇒ 70% of $500 = 0.7 × $500 = $350

Account balance = principal + interest earned after tax

= $1,000 + $350

= $1,350