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Engineering Economics: Time value of money and interest · Simple and Compound Interest

How simple and compound interest grow money differently, and how to compute, compare and discount sums over time.

Engineering Economics · 30 questions

Try 3 questions

1. Under simple interest, what is the interest calculated on each period?

  1. The balance left after each withdrawal
  2. Only the original principal
  3. The principal plus interest already earned
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Answer: Only the original principal

Simple interest ignores accumulated interest: every period earns the same amount, principal times rate.

2. You lend 1,000 at 10% simple interest per year for 3 years. How much interest do you earn in total?

  1. 331
  2. 310
  3. 300
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Answer: 300

Simple interest is principal times rate times time: 1,000 x 0.10 x 3 = 300. The 331 figure would come from compounding.

3. You deposit 1,000 at 10% compounded annually. What is the balance after 3 years?

  1. 1,310
  2. 1,331
  3. 1,300
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Answer: 1,331

Each year multiplies the balance by 1.10: 1,000 x 1.1 x 1.1 x 1.1 = 1,331.

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