Question

You just won $2,500 dollars on a scratch-off lottery ticket! You've been interested in investing, so now is your chance. If you invest that $2,500 for 5 years with a simple annual interest rate of 8%, how much will it be worth at the end of that 5 years? $2.712 $3.100 $3,500 $3,673

Answer 1

Question 1): Investment Value = $ 2500; Tenure = 5 years and Rate of Interest = 8%

Using Simple Interest = 2500 +(2500 * 8% * 5) = 2500 + 1000 = $ 3500

Answer : $ 3500

Question 2): Investment Value = $ 2500; Tenure = 5 years and Rate of Interest = 8%

Using Compounding Interest = 2500 * (1 + 8%) ^5 = $ 3673.32 ( Greater than that of the value earned using Simple Interest)

Answer : More

Question 3): Investment Value = $ 2000; Tenure = 3 years and Rate of Interest = 10%

Using Compounding (Annual) Interest = 2000 * (1 + 10%) ^3 = $ 2662

Answer : $2662

Answer 2

SOLUTION :

1.

r = 8% = 0.08 (simple interest rate)

A = 2500 ($)

n = 5 years

FV = A(1 + r * t) = 2500( 1 + 0.08 * 5) = 3500 ($) : Third Option. (ANSWER)

2.

r = 8% = 0.08 (annual compounding)

In compounding, one gets interest on earned interest also.

So, total interest earned at the end of 5 years will be more than what it was at simple interest rate.

Hence, Option : More (ANSWER).

3.

Annual compounding.

r = 10% = 0.1

=> 1 + r = 1.1

A = 2000 ($)

n = 3 years 

So,

FV = A(1 + r)^n = 2000 * 1.1^3 = 2662 ($) : 4th Option (ANSWER).