Simple and Compound Interest 1 How much must you deposit tod

Simple and Compound Interest 1) How much must you deposit, today, in order to accumulate $50000 in 6 years, if you earn 8% compounded annually on your investment? Perform your calculation first using a formula and then using the tables provided. Repeat above problem with simple interest rate of 8% for 6 years. If there is a difference in the results, explain why?

Solution

By using formula:

PV = F / (1 + i)ⁿ = 50000 / (1 + 0.08)⁶ = 50000 / 1.5868 = $31510

By using table value:

PV = F(P/F, i, n) = 50000(P/F, 8%, 6) = 50000(0.6302) = $31510

BY using simple interest

P + (P * 0.08 * 6) = 50000

P + 0.48P = 50000

P(1+0.48) = 50000

1.48P = 50000

P = 50000 / 1.48 = $33784

Yes, there is a difference. Because in case of compound interest, interst is cumulated whereas in case of simple interest, it is not cumulated.