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Business Mathematics: Simple Interest

Simple interest is calculated by multiplying the daily interest rate by the principal and number of days. Compound interest is interest on interest, where unpaid interest is added to the principal to calculate future interest. Depreciation reduces the recorded cost of a fixed asset over time according to its rate of depreciation per period. Accumulated value refers to the future sum of an amount including interest compounded over time, while present value is the current worth of future payments discounted at a given rate.

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318 views

Business Mathematics: Simple Interest

Simple interest is calculated by multiplying the daily interest rate by the principal and number of days. Compound interest is interest on interest, where unpaid interest is added to the principal to calculate future interest. Depreciation reduces the recorded cost of a fixed asset over time according to its rate of depreciation per period. Accumulated value refers to the future sum of an amount including interest compounded over time, while present value is the current worth of future payments discounted at a given rate.

Uploaded by

Vishal Mehta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Business Mathematics

SIMPLE INTEREST

 Simple interest is calculated by multiplying the


daily interest rate by the principal, by the number of
days that elapse between payments. 
 Simple interest benefits consumers who pay their
loans on time or early each month.
 Auto loans and short- term personal loans are
usually simple interest loans.
 The interest calculated on principal amount only,
whatever may be the period, is simple interest.
 While for compound interest, the interest on the
interest amount is calculated and is added to the
principal for the next period of time.
 This is calculated on original principal amount only,
the term or time can be anything, in fractions, as
well. The formula is
PXNX R
SI =
100

 Where SI - Simple interest, P – Principal, N –


Period, R – Rate of interest
 Note : sometimes, i denotes R / 100 i represents the
rate of interest per unit per annum. Here

SI = P X N X i
COMPOUND INTEREST

 Compound interest is the addition of interest to the


principal sum of a loan or deposit, or in other
words, interest on interest.
 If the unpaid interest is added to the principal, to
calculate interest for the next period, it is compound
interest. E.g. if ₹2,000 are kept in a bank for 2
years, at 10% rate p.a., the interest on ₹ 2,000, after
1 year is 2000 x 0.10 = 200.
 For second year, the principal becomes 2,000 + 200
= 2,200 and the interest on its is 2,200 x 0.1 = 220.
 Hence the total interest is 200 + 220 = ₹ 420.
 At the same time, the simple interest for 2 year will
be 2,000 x 2 x 0.1 = ₹ 400. So, compound interest
for a principal is more than simple interest on the
same amount for the same period
 Formulae P – principal; R – rate of interest per
period; n – period or time; A - amount or
accumulated value,

I. The formula for accumulated value A is

( )
n
R
A=P 1+
100

II. Let CI = compound interest, after n periods,


where

CI = A – P = P( )
n
R
1+ −P
100
III. The compound interest for K period is th

calculated as
= interest for K periods – interest for (K – 1)
periods
It can also be calculated as
= accumulated amount after K periods –
accumulated amount after (K – 1) periods

= P( ) - P( )
K K−1
R R
1+ 1+
100 100

= P( ) ( )
K−1
R R
1+ 1+ −1
100 100

P( ) ( )
K−1
R R
1+
= 100 100

NOTE :
1. Many times, rate of interest per unit annum is denoted by
i. That is
R
i = 100. hence the above formulae can be written as,
A = P¿ ¿
CI = P ( 1+i ) – P
n

Interest for K period = P ( 1+i )


th K−1
(i )

2. The formula can be also be used for depreciation as


DV = P¿ ¿,
Where DV denotes depreciated value at the end of n
periods.
DEPRECIATION

 In accounting terms, depreciation is defined as the


reduction of recorded cost of a fixed asset in a
systematic manner until the value of the asset
becomes zero or negligible.
 An example of fixed assets are buildings, furniture,
office equipment, machinery etc.
 Any vehicle like a car, a scooter, a bike has a
decreasing performance during its life span.
 A machinery of any type also suffers from this
drawback.
 So, while resale is considered, the original price
can never be the resale price as depreciation is
considered for the time period. E.g.
 If a machinery is purchased at ₹ 80,000 and if 10%
depreciation is considered per year, then for second
year, its resale price is 80,000 – 10% of 80,000 =
72,000, for third year, its resale price is 72,000 –
10% of 72,000 – 64,800 and so on.
 In general, the depreciation value after n years
= P¿ ¿, where P = original price, I – rate of
depreciation per unit p.a.
ACCUMULATED VALUE

 Future value is the value of an asset at a


specific date.
 It measures the nominal future sum of money
that a given sum of money is "worth" at a
specified time in the future assuming a certain
interest rate, or more generally, rate of return;
it is the present value multiplied by the
accumulation function.
 The future value refers to the accumulated
amount of a sum of money including the
interest amount after a specified period at a
given rate of interest.
 The concept of future value can be applied for
simple interest and compound interest as well.
 But, usually, the accumulated value, is referred
to, with reference to compound interest.
 It helps in giving the accumulated amount in
future if a given period of, say n year, at a
given rate, say i % of compound interest,
compounded annually.
 The formula to calculate it, is as follows
A = P¿ ¿
i.e. sum due = principal amount X (1+i)
n
PRESENT VALUE

 Present value (PV) is the current value of a


future sum of money or stream of cash flows
given a specified rate of return.
 Future cash flows are discounted at the
discount rate, and the higher the discount rate,
the lower the present value of the future cash
flows.
 This concept is exactly opposite of accumulated
value, including compound interest. E.g.
 If a principal of ₹12,000, after 2 years, with 10%,
rate of interest, compound, annually returns ₹
14,520, it implies that receiving ₹ 14,520, after 2
years is equivalent to having ₹ 12,000 now, if the
rate is 10% p.a. ₹ 12,000 is called present worth or
present value and ₹ 14,520 is called the sum due
i.e. the amount payable at the future date. We have

Present value = ∑¿ ¿d¿ue = A


¿¿¿

Sometimes, present value is called discounted


value and the process of finding the present value if
called discounting.

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