An employee put $4,000.00 in a retirement account that offers 8% interest compounded annually. The employee makes no additional deposits or withdrawals. Which amount is closest to the interest the employee will have earned at the end of 6 years?
Responses
A $6,347.50$6,347.50
B $320.00$320.00
C $1,920.00$1,920.00
D $2,347.50
The formula for compound interest is:
A = P(1 + r/n)^(nt)
where A is the ending amount, P is the principal (initial amount), r is the interest rate, n is the number of times interest is compounded per year, and t is the number of years.
In this case, the principal (P) is $4,000.00, the interest rate (r) is 8% or 0.08, the interest is compounded annually (n = 1), and the number of years (t) is 6.
Plugging in these values to the compound interest formula, we get:
A = 4000(1 + 0.08/1)^(1*6)
A = 4000(1.08)^6
A ≈ $6,038.48
Therefore, the answer closest to the interest the employee will have earned at the end of 6 years is option A) $6,347.50.