Note that simple interest only pays interest on the original balance, NOT on the accrued (paid) interest....
a) 5 more years at 10% simple: (2500 * 0.10 * 5) + 3,000 = $4,250
or
5 years compound interest on $3k: 3,000(1.07^5) = $4,207.66
b) TOTAL of 10 years
simple interest: (2500 * 0.10 * 10) + 2500 = 5,000
compound interest: only 8 years remain of the total 10 year time horizon
3000(1.07^8) = $5,154.56
Compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on.
Suppose you invest $2,500 in a fund earning 10% simple interest annually. After two years you have the option of moving your money to an account that pays compound interest at an annual effective rate of 7%. Should you move your money to the compound interest account
(a) if you wish to liquidate in five more years?
(b) if you are confident your money will stay on deposit for a total of ten years?
The answers to (a) is no, $4,250 > $4,207.66, and the answer to (b) is yes, $5,000 < $5,154.56, but I don't know how to get there, so showing work would be extremely helpful. Thank you
