Tech Marketing Inc. is an online and social marketing consulting firm that start
ID: 2721946 • Letter: T
Question
Tech Marketing Inc. is an online and social marketing consulting firm that started in Michael David’s garage. The company now has 10 employees that must work in shifts due to the small space. Michael has decided to accept $210,000 from the investor for 50% ownership in his company and use it to grow Tech Marketing into a national consulting firm. However, during the next two years he plans to spend only $10,000 and invest the remaining $200,000 for two years at 6% interest rate compounded monthly.
a.How much cash will the company have at the end of two years? (You can use the compound interest calculator at http://math.about.com/library/blcompoundinterest.htm) How much of that will be interest income?
b.How much interest would Tech Marketing earn if it invested the $200,000 at 6% simple interest? Please show calculations.
c.How much more interest income did the compound interest option earn? Please show calculations.
Explanation / Answer
A ) Now we go for find out the cash at the end of 2 years going to use the formula for interest compounded monthly to find the amount on investment of $200,000 for two years with 6% interest
A = P(1 + r/n)^(nt)
P= 200,000
r = 0.06
t = 2
n = 12
A= $225,432
The total cash if invested for 2 years compounded monthly at 6% rate would be $225,432 .
the interest amount would be = 225,432 – 2000,000 = 25,432
b ) to calculate the total cash at end of 2 years invested $200,000 at 6% simple interest , the formula is
A = P(1 + rt);
Where R = r * 100
Where:
Putting values in formula
A= 200000(1+0.06*2)
A= 200000 (1+.12)
A= 200000 x 1.12
A = 224,000
The total amount is $224000 is iinclusive of principal and interest , the interest amount will be
Interest = 224,000 – 200,000
Interest = $24,000
C) the difference between interest earned on compound interest that is $25,432 and simple interest of $24,000 is
Difference = 25,432 – 24,000
Difference = 1,432 interest is earned more in comapound interest than simple interest
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