An additional interest of $ 4.08 is earned in year 5 by using compound interest and in comparison with simple interest method.
Simple interest (C) is the amount of money gained and solely related to the initial capital ([tex]C_{o}[/tex]), in monetary units. The money earned by simple interest is determined by the following formula:
[tex]C = \frac{C_{o}\cdot r\cdot t}{100}[/tex] (1)
Where:
Compound interest (C) takes into account the capital throughout time and its formula is presented below:
[tex]C = C_{o}\cdot \left[\left(1+\frac{r}{100} \right)^{t}-1\right][/tex]
Now we proceed to determine the simple and compound interest: ([tex]C_{o} = 1000[/tex], r = 2, t = 5)
C = [(1000) · (2) · (5)]/100
C = $ 100
C = (1000) · {[1+(2/100)]⁵-1}
C = $ 104.08
An additional interest of $ 4.08 is earned in year 5 by using compound interest and in comparison with simple interest method. [tex]\blacksquare[/tex]
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