An initial investment of \(\$12{,}000\) is placed in two different accounts.
Account 1 has balances of \(\$13{,}440.00\) after \(2\) years, \(\$14{,}880.00\) after \(4\) years, and \(\$16{,}320.00\) after \(6\) years.
Account 2 has balances of \(\$13{,}483.20\) after \(2\) years, \(\$15{,}149.72\) after \(4\) years, and \(\$17{,}022.23\) after \(6\) years.
a) Determine whether each account follows a linear or exponential model.
b) Find the yearly dollar increase for the linear model and the annual interest rate for the exponential model.
c) Find the balance in each account after \(10\) years.
Hints
- Check whether equal time intervals produce equal differences or equal ratios.
- Find the differences between consecutive balances.
- Find the ratios between consecutive balances.
- The data are given in \(2\)-year intervals, but part b asks for yearly growth.
Solution
1. For Account 1, the balance increases by \(1440\) every \(2\) years: \(13{,}440-12{,}000=1440\), \(14{,}880-13{,}440=1440\), and \(16{,}320-14{,}880=1440\). Therefore, it is linear, with a yearly increase of \(1440\div2=720\).
2. For Account 2, the consecutive \(2\)-year growth factors are \(\frac{13{,}483.20}{12{,}000}=1.1236\), \(\frac{15{,}149.72}{13{,}483.20}\approx1.1236\), and \(\frac{17{,}022.23}{15{,}149.72}\approx1.1236\). Thus the model is exponential. The yearly growth factor satisfies \(b^2=1.1236\), so \(b=1.06\), giving an annual interest rate of \(6\%\).
3. After \(10\) years, Account 1 has \(12{,}000+10\cdot720=19{,}200\). Account 2 has \(12{,}000\cdot(1.06)^{10}\approx21{,}490.17\).
Answer
a) Account 1 is linear; Account 2 is exponential.
b) Account 1 increases by \(\$720.00\) per year. Account 2 earns \(6\%\) per year.
c) Account 1: \(\$19{,}200.00\); Account 2: about \(\$21{,}490.17\)