Question

Suppose you have $500 to invest and you believe that you can earn 8% per year over the next 15 years.

How much would you have at the end of 15 years using compound interest?

How much would you have using simple interest?

Answer 1

Please find the below explanation and “ Don’t forget to give a like! Thank you”

1)

We will apply time value of money formula

FV = PV (1+ r)ⁿ   

FV = Future value

PV = present value = $500

r = rate of interest = 8%

n = number of periods = 15 years

By applying the formula

FV = $500(1+ 0.08)¹⁵

= $500(1.08)¹⁵

= $500(3.172169)

= $1586.08

Using compound interest i would have $1586.08 at the end of 15 years

2)

Future value with simple interest.

FV = PV(1+ r * t)

FV = Future value

PV = present value = $500

r = rate of interest = 8%

t = time in years = 15

FV = $500(1+ 0.08 * 15)

= $500(1+ 1.2)

= $500(2.2)

= $1100

using simple interest i would have $1100.