Question

You decide you want to lend your friend $1234 for 3 years using 10%. Calculate how much does your friend have to pay you back with simple interest vs. compounding interest?

Answer 1

With simple interest = $1,604.2

With compound interest = $1,642.454

Step-by-step explanation:

Data provided in the question:

Amount lend = $1,234

Time = 3 years

Rate of interest, r = 10% = 0.10

Now,

With simple interest :

Interest = Principle × Rate × Time

= $1,234 × 0.10 × 3

= $370.2

Therefore,

Total amount paid = Principle + Interest

= $1,234 + $370.2

= $1,604.2

With compound interest :

Amount to be paid = Principle × ( 1 + r )ⁿ

= $1,234 × ( 1 + 0.10 )³

= $1,234 × 1.1³

= $1,234 × 1.331

= $1,642.454