Question

Answer the following problems in an Excel file. Please upload only one Excel file with all of your answers, including #3 (which requires an explanation rather than a calculation). All problems must be solved using the PV and FV functions in Excel.

1. If I deposit $8,000 in a bank account that pays interest of 1.5%, compounded annually, how much will I have in the account after 10 years?

1. If I deposit $8,000 in a bank account that pays simple interest of 1.5%, how much will I have in the account after 10 years?

1. How would you explain the difference in the answers to the foregoing two problems, given that both banks pay interest at the same rate? Be specific.

1. You graduate from college and obtain a job paying an annual salary of $35,000. You estimate that you will receive a 10% salary increase each year. If you receive those salary increases, how much will you be earning after 4 years?

1. You deposit $5,000 in a bank account today that pays 2% interest, compound annually. You make no withdrawals from the account until 4 years have passed and then you withdraw all of the money that has accumulated in that account and deposit it into another bank that pays 3% interest compounded annually. You leave your money in the second bank for an additional 3 years. How much money will you have after the 7 years?

Answer 1

	Compound Interest	Simple Interest
Principal	8000	8000
Interest	1.50%	1.50%
Years	10	10
Amount	8000*(1+1.5%)^10	8000+(8000*1.5%*10)
Amount	9,284.33	9,200.00
Different in amount is due to compounding effect of interest.
In compound interest, further interest is earned on previous interest earned but in simple interest
interest amount remains same for each year.
Staring salary	35000
Raise	10%
Salary after 4 years	35000*(1+10%)^4
Salary after 4 years	51,243.50
Principal	5000
Interest	2.00%
Years	4
Amount	5000*(1+2%)^4
Amount	5412.1608
Principal	5412.1608
Interest	3.00%
Years	3
Amount	5412.1608*(1+3%)^3
Amount	5,914.01