Example 1: Assume you invest $1,000 at 6% simple interest for 3 years.
How much interest would you
earn for 3 years?
1000 x 6% x 3 = $180
Example 2: Barstow Electric Inc. borrows $10,000 for 3 months at a simple interest rate of 8% per year,
the interest is computed as follows.
10000 x 8% x 3/12 = $200
Example 3: Tom Company deposits $10,000 in the Last National Bank, where it will earn simple interest
of 9% per year.
It deposits another $10,000 in the First State Bank, where it will earn compound interest of 9% per year
compounded annually. In both cases, Tom company will not withdraw any interest until 3 years from the
date of deposit.
S. I = 10000 x 9% x 3
= 2700
Compound Interest
10000 x 9% = 900.00 10900
10900 x 9% = 981.00 11881
11881 x 9% = 1069.29 12,950.29
Example 4: Assume you deposit $1,000 in a bank that earns 6% interest compounded annually for 3
years. What is the balance in your account at the end of three years?
1000 x 1.19102 = 11,9102
Example 5: Assume that Commonwealth Edison Company deposited $250 million in an escrow account
with Northern Trust Company at the beginning of 2017 as a commitment toward a power plant to be
completed December 31, 2020. How much will the company have on deposit at the end of 4 years if
interest is 10%, compounded semiannually?
N=4x2=8
I = 10% / 2 = 5%
250,000,000 x 1.47746 = $369365000
Example 6: Assume you plan to buy a new car in 5 years and you think it will cost $20,000 at that time.
PV = 20,000 / (1+8%)^5 = 13611.6
PV = 20,000 / 0.68058 =13611.6
What amount must you invest today in order to accumulate $20,000 in 5 years, if you can earn 8%
interest compounded annually?
$13611.6
Example 7: Assume that your rich uncle decides to give you $2,000 for a trip to Europe when you
graduate from college 3 years from now. He proposes to finance the trip by investing a sum of money
now at 8% compound interest that will provide you with $2,000 upon your graduation. The only
conditions are that you graduate and that you tell him how much to invest now.
PV = 2000/(1+8%)^3 = 1587.66
PV = 2000 / 0.79383 = 1587.66
Example 8 Computation of the Number of Periods
The Village of Somonauk wants to accumulate $70,000 for the construction of a veterans monument in
the town square. At the beginning of the current year, the Village deposited $47,811 in a memorial fund
that earns 10% interest compounded annually. How many years will it take to accumulate $70,000 in the
memorial fund?
PV = FV (PVFn .10%)
47811 = 70,000 (PVFn .10%)
PVFn = 47811/70000
PVFn = 0.68301
N = 4 (From the table)
Example 9: Advanced Design, Inc. needs $1,070,584 for basic research 5 years from now. The company
currently has $800,000 to invest for that purpose. At what rate of interest must it invest the $800,000 to
fund basic research projects of $1,070,584, 5 years from now?
1070584 = 800,000 x (1+ i)^5
I = 0.06 = 6%
(1+i)^5 = 1070584/800,000 = 1.33823
I = 6% n= 5
Example 10. If there is one investment of $10,000 at the end of each year, and annual interest rate is
2%, what will be the fund balance in 4 years?
FV = 10,000 x (1+2%)^3 = 10612 1
10,000 x (1+2%)^2 = 10404 2
10,000 x (1+2%)^1 = 10200 3
10,000 4
Total = 41216
Example 11. Hightown Electronics deposits $75,000 at the end of each 6-month period for the next 3
years, to accumulate enough money to meet debts that mature in 3 years. What is the future value that
the company will have on deposit at the end of 3 years if the annual interest rate is 10%?
N = 3x 2 = 6
I = 10%/ 2 = 5%
75,000 x 6.80191
= 510143.25
