OFFICIAL EXPLANATION
Hi All,
We're told that a $5,000 investment can be placed into one of 2 accounts:
1) An account that earns 10 percent simple interest for 2 years or...
2) An account that earns 10 percent compound interest for 2 years.
We're asked to find the number of additional dollars of interest that will be earned by investing the $5,000 in the compound interest account. The Simple Interest Formula and Compound Interest Formula are standard formulas on the GMAT - and it's likely that you will be asked to use one (or both) on Test Day. With this question, we have all of the 'numbers' that we need, so we just have to plug them into the 2 formulas (and you can actually do the necessary "math" in a number of different ways):
Simple Interest: (Principal)(1 + rt) = ($5,000)(1 + (.10)(2)) = ($5,000)(1.2) = $6,000
Compound Interest: (Principal)(1 + r)^t = ($5,000)(1 + .1)^2 = ($5,000)(1.21) = $6,050
Difference = $11,050 - $11,000 = $50
Final Answer:
GMAT assassins aren't born, they're made,
Rich
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