Simple and compound interest: saving in a cooperative
Save money in a cooperative at simple or compound interest, watch the interest on interest grow, and see how a motorbike loses value.
Core concept
Simple interest is the same every year; compound interest earns interest on interest; depreciation takes a percentage of the value each year
Topic: Interest and depreciation
A family saves Rs 50,000 in a cooperative (sahakari) at 10% a year. With simple interest the cooperative pays 10% of Rs 50,000, Rs 5,000, every year, so after T years the amount is P(1 + RT/100). With compound interest each year's interest is added to the savings, and the next year's 10% is worked out on the bigger amount, so the savings earn interest on interest: A = P(1 + R/100)^T. Depreciation works the other way: a motorbike loses a percentage of its value each year, so its value is P(1 − R/100)^T.
What you will learn
- Calculate simple interest and the amount after T years.
- Calculate compound interest and explain interest on interest.
- Calculate the value of an item after depreciation.
Before you start
- Percentages and powers of a number.
Materials
- A cooperative passbook
Equipment
- A calculator
Procedure
- Tap the chip to switch between simple interest, compound interest and depreciation.
- Tap − or + to change the money, the rate and the number of years.
- Record Rs 50,000 at 10% for 3 years with simple interest, and then with compound interest.
- Find how long compound interest at 10% takes to double the savings, and the value of a Rs 2,00,000 motorbike after 3 years at 15% depreciation.
How this simulation is simplified
- Interest is added once a year, and no money is taken out.