Present Amount

Problem
\$180,000 was spent on the project that yields annual benefit of \$60,000 for a period of 8 years without any salvage value. Determine the benefit-to-cost ratio considering the cost of money to be 7%.

A.   1.99 C.   1.57
B.   2.21 D.   2.63

 

Compound Interest

In compound interest, the interest earned by the principal at the end of each interest period (compounding period) is added to the principal. The sum (principal + interest) will earn another interest in the next compounding period.
 

Consider \$1000 invested in an account of 10% per year for 3 years. The figures below shows the contrast between simple interest and compound interest.
 

 
 
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