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# Note for Engineering Economics - EE by Ankur Kukreti

• Engineering Economics - EE
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Ankur Kukreti
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Prepared By-: Ankur Kukreti Assistant Professor Shivalik College of Engineering QUESTION BANK Q1. Write down the advantages of Compound Interest over Simple Interest? The advantages of compound interest over simple interest are as follows-: Firstly, in S.I interest is calculated as a percentage of the principal amount whereas in C.I interest is calculated as a percentage of principal and accrued interest giving higher amount at the end of the period. Secondly, return on compound interest is higher as compared to the return on Simple Interest. Thirdly, growth of money in compound interest is rapid as compared to the uniform growth of Simple interest. Fourthly, interest is charged on principal + accumulated interest in compound interest whereas interest is charged on constant principal in simple interest therefore compound interest generates more money. Fifthly, C.I generates a higher amount as compared to that of S.I in same period. The following example will explain the difference between the simple and the compound interest. Example: A person has taken a loan of amount of Rs. 10,000 from a bank for a period of 5 years. Estimate the amount of money, the person will repay to the bank at the end of every year for 5 years for the following cases; a) Considering simple interest rate of 8% per year b) Considering compound interest rate of 8% per year Payment using simple interest Year Amount of interest (Rs.) Total amount owed (Rs.) 1 2 3 4 5 800 800 800 800 800 10,800 11,600 12,400 13,200 14,000 Payment using compound interest Year 1 2 3 4 5 Amount of interest (Rs.) 800.00 864.00 933.12 1007.77 1088.39 Total amount owed (Rs.) 10,800.00 11,664.00 12,597.12 13,604.89 14,693.28 Q2. Write down the advantages of Simple Interest over Compound Interest?

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Though C.I has many advantages over S.I but still S.I is preferred over C.I due to the following reasons-: Firstly, S.I is easier to understand. Secondly, Implementation and calculation of S.I is easier as compared to that of C.I. Finally, S.I is widely used in between relatives and friends whereas C.I is used mainly in business transactions. The following example will explain the difference between the simple and the compound interest. Example: A person has taken a loan of amount of Rs. 10,000 from another for a period of 5 years. Estimate the amount of money, the person will repay to the lender after for 5 years for the following cases; a) Considering simple interest rate of 8% per year b) Considering compound interest rate of 8% per year S.I= PRT/100 S.I=10000*8*5/100 S.I=4000 C.I=P{(1+r/100)n-1} C.I=10000{(1+8/100)5-1} C.I=10000{(1.08)5-1} C.I=10000{1.469-1} C.I=10000*0.469 C.I=4693.28 Q3. Define the following-: Simple Interest Compound Interest Simple interest: The interest is said to be simple, when the interest is charged only on the principal amount for the interest period. No interest is charged on the interest amount accrued during the preceding interest periods. In case of simple interest, the total amount of interest accumulated for a given interest period is simply a product of the principal amount, the rate of interest and the time period. It is given by the following expression. S.I.=PRT/100 Where S.I, = total amount of simple interest P = Principal amount R=rate T=time period. Compound interest: The interest is said to be compound, when the interest for any interest period is charged on principal amount plus the interest amount accrued in all the previous interest periods. Compound interest takes into account the effect of time value of money on both principal as well as on the accrued interest also. The following example will explain the difference between the simple and the compound interest. C.I=P{(1+r/100)n-1} Where C.I, = total amount of compound interest P = Principal amount r=rate n=time period. Q4. If Rs.6000 has been put on interest at 12% p.a. for 2 years. How much Amount is received after 2 years if interest is compounded semi-annually? P=Rs. 6000 r=12% n=2 years