Using the simple interest formula, answer the following question: Andrew adds $750 to his mutual fund every year for the next 10 years. Stephanie decides to wait 10 years when she knows she will have a lump sum of $9,000 to invest in a mutual fund. If both Andrew and Stephanie earn on average a 5 percent rate of return, who will have the larger mutual fund balance in 20 years?

Answer: Andrew

Given:

$750 - Andrew’s mutual fund every year until the 10th year

$9000 - Stephanie’s mutual fund in the 10th year

5% - average percent rate of return

To determine who will have the larger mutual fund balance in 20 years, we will use the simple interest formula which is the interest gained only on the principal.

Let X = the principal amount of Andrew’s mutual fund after 20 years

X = (750+750 (.05)) * 20

X = (750+37.50) * 20

X=787.50 (20)

X=15,750 in 20 years

Let Y=principal amount of Stepanie’s mutual fund after another 10th year

Y=9000 + (9000 (.05) * 10)

Y=9000 + (450*10)

Y=9000+4500

Y=13,500

X>Y so Andrew has the greater mutual balance.