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 5 years?
$5600.0
$1600.00
$1877.31
$5877.31
The correct answer is $5877.31.
To calculate the amount of interest earned, we can use the formula for compound interest:
A = P(1 + r/n)^(nt)
where:
A = the future value of the investment/loan, including interest
P = the principal investment amount
r = the annual interest rate
n = the number of times that interest is compounded per year
t = the number of years the money is invested/borrowed for
In this case, P = $4000, r = 0.08, n = 1, and t = 5. Plugging these values into the formula:
A = $4000(1 + 0.08/1)^(1*5) = $4000(1.08)^5 = $5877.31
Therefore, the employee will have earned $5877.31 in interest at the end of 5 years.