Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much return will his investment earn during this time period?

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First, restating the problem: Mr. Nailor invests $5,000 at 8% annual interest for 7 years in a money market account. We are asked how much return (interest) the investment earns during this period.
Option A: $3,569.12134
To verify, compute the future value with compounding annually: FV = P(1 + r)^n = 5000(1.08)^7. Using the exponent calculation, (1.08)^7 ≈ 1.7138247. So FV ≈ 5000 × 1.7138247 ≈ 8569.1235. The return (interest earned) is FV − P ≈ 8569.1235 − 5000 ≈ 3569.1235. This aligns very closely with $3,569.12134, considering rounding variations, so this option is consistent with compound interest.
Option B: $8,570.67534
If this were the total amount after 7 years, it would imply FV ≈ 8570.67534, which would mean interest earned ≈ 8570.67534 − 5000 ≈ 3570.67534, but this does not reflect the correct calculation of FV under 8% annual compounding for 7 years. The value is too large for the given principal and rate when considering typical compounding results over 7 years.
Option C: . $2,915.56489
This figure is roughly half of the correct interest amount, suggesting a miscalculation such as using simple interest for 7 years (Interest = P × r × t = 5000 × 0.08 × 7 = 2800) or misplacing a decimal. The correct compound-interest result is around 3569, not 2915, so this is incorrect.
Option D: $6,254.64537
This amount would correspond to a larger future value after 7 years, implying either a higher effective rate or an error in compounding calculation (or treating the interest as if it were earned each year on the growing balance without subtracting principal). Given P = 5000 and r = 0.08 for 7 years, the earned interest should be around 3569, not 6254, making this option inconsistent with the standard compounding result.
In summary, option A aligns with the compound-interest calculation for 8% over 7 years, yielding an interest earned of approximately $3,569.12. The other options reflect common missteps such as misapplying simple interest, misplacing decimal points, or miscomputing the future value, leading to values that are too large or too small compared to the correct compound-interest result.

25_2 FIN401 Financial Management

Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much return will his investment earn during this time period?

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25_2 FIN401 Financial Management

Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much return will his investment earn during this time period?

View Explanation

Log in for full answers

Similar Questions

Part 1Consider a twominus−year ​investment: Given a constant and positive interest​ rate, the interest earned in the second year will be greater than the interest earned in the first year​ (assuming annual​ compounding). Part 1 True False

If Jack and Jill deposit $1,000 into a savings account that earns 4.5% annual interest (compounded monthly), how long will it take for their money to double to $2,000?

How much will you get back on a five year investment of $100 that pays 5% interest per year?

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If you deposit $10,000 in an account with an annual rate of 9% compounded semiannually, how long will it take for you to have $2,000,000 in the account?

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With compound interest, the investor earns interest on the principal amount invested plus interest on accumulated interest. Which of the following compounding frequencies would yield the investor the greatest ending balance assuming all else is equal?

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Part 1Consider a twominus−year investment: Given a constant and positive interest rate, the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding). Part 1 True False