Compare the difference between simple and compound interest. |
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The basic assumption is that compound interest pays interest on previous earnings and simple interest only pays interest on the initial principal balance. The year-by-year values are calculated using a worksheet with the following columns: Column 1 is the year. Column 2 is the balance at the beginning of the year. Column 3 is the interest earned = Column 2 * annual rate of return. Column 4 is the cumulative interest earned = Summation of Column 3 values. Column 5 is the reinvested interest = 0 for Simple interest, or Column 3 for Compound Interest calculation. Column 6 is the end of year balance = Column 2 for Simple interest, or Column 2 + Column 3 for Compound Interest calculation. Column 7 is the end of year balance + cumulative interest earned = Column 4 + Column 6 (only used for Simple Interest worksheet). |