3.2 Compare the interest earned by $10,000 for five years at 10% simple interest with
that earned by the same amount for five years at 10% compounded annually.
GIVENS
Principal = $10,000
Interest rate = 10%
Number of Years = 5 DETERMINE
Compare the interest earned using simple interest and interest compounded annually. ANALYSIS
Simple Interest
Step 1: Multiply the principal, the interest rate, and the number of years.
Interest = $10,000 x .1 x 5 = $5,000 Step 2: The formula to find the future value with interest is Amount = Principal +
Interest
Amount = $10,000 + $5,000
Final Future Value at 10% simple interest is $15,000 Interest Compounded Annually A= P(1 + rn)nâ‹…t A = total amount
P = principal
r = interest rate
n = # times compounded each
year
t = time (years) P=$10,000 , r=10% , n=1 and t=5 years
$16,105.10 = $10,000 + Interest = $6,105.10
Final Future Value at 10% annually compounded interest is $6,105.10 CONCLUSION
Starting
Year 1
Year 2
Year 3
Year 4
Year 5 Simple Interest
$10,000.00
$11,000.00
$12,000.00
$13,000.00
$14,000.00
$15,000.00 Compound Interest
$10,000.00
$11,000.00
$12,100.00
$13,310.00
$14,641.00
$16,105.10 During the span of five years, interest that compounds annually will earn an additional
$1,105.10 Simple vs Compound Interest
10% Interest Rate for 5 Years
17,000 $16,105.10 16,000 $15,000.00 15,000
14,000 Simple Interest
Future Value 13,000 Compound Interest 12,000
11,000
10,000 0 1 2 3 4 5 Years 3.13 For an interest rate of 13% compounded annually, determine the
following.
(a) How much can be lent now if $12,000 will be repaid at the end of four
years?
(b) How much will be required in five years to repay a $30,000 loan
received now?
GIVENS
DETERMINE
ANALYSIS
CONCLUSION
3.19 If you desire to withdraw the amounts given in Table P3.19 over the
next five years from a savings account that earns 7% interest compounded
annually, how much do you need to deposit now? GIVENS
DETERMINE
ANALYSIS
CONCLUSION 3.39 Five annual deposits in the amounts of $10,000, $8,000, $6,000, $4,000, and
$2,000, in that order, are made into a fund that pays interest at a rate of 8%
compounded annually. Determine the amount in the fund immediately after the fifth
deposit. GIVENS DETERMINE
ANALYSIS
CONCLUSION
3.51 Find the equivalent present worth of the cash receipts where i = 8%. In other
words, how much do you have to deposit now (with the second deposit in the amount of
$200 at the end of the first year) so that you will be able to withdraw $200 at the end of
second year, $120 at the end of third year, and so forth if the bank pays you an 8%
annual interest on your balance? GIVENS
DETERMINE
ANALYSIS
CONCLUSION

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