Gazini is planning to invest her separation fee from her working company after she resigned as Payroll Supervisor. She received Php 230,000.00 and plan to invest it for 5 years. Which investment is better? A bank offers 7.5% simple interest and a year or a lending company offers 7.5 % compounded annually?
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• Simple interest is based on the principal amount of a loan or deposit. In contrast, compound interest is based on the principal amount and the interest that accumulates on it in every period.
Given:
Principal, P = Php230,000
Time, t = 5 years
→ Bank offers 7.5% simple interest
→ Rate, r = 7.5% = 7.5/100 = 75/1000
Interest
→ Maturity value = 230000 + 86250 = Php316250
→ lending company offers 7.5% compounded annually
→ interest rate, r = 7.5% = 7.5/100 = 0.075
• Maturity value of lending company is more than the maturity value of bank. Hence, Lending company offers more interest.
Answer: Investing in a lending company is better