Question

Nancy wants to receive the most return on a $50,000 investment. She has two options. Option 1 gives annual interest at 5% compounded yearly. Option 2 gives annual interest at 3.5% compounded monthly. Which option is better after 3 years, and what is the difference in earned interest? 1Option 2 earns more interest by $3,581.52. Option 2 earns more interest by $2,396.13. Option 1 earns more interest by $2,396.13. Option 1 earns more interest by $3,581.52.

Answer 1

Option 1 earns more interest by $2396.13

Explanation:

Step 1: Determine the prices

50000(1 + 0.05)^3 = 57881.30

50000(1 + 0.0035/12)^36 = 55527

Step 2: Determine which pays higher

Step 3: Find difference

57881.30 - 55527 = 2396.13

And we have our final answer!