Last Updated on September 21, 2026 by Maged kamel
The difference between simple and compound interest, part 2.
Time Value of Money part-1- from Prof. Pamela Peterson.
This is our new Post on compound interest, part 2, which includes an excerpt from Prof. Pamela Peterson Drake’s reference, in which she introduces an example of a $1000 investment in an account that pays 6% per year as compound interest.
How to estimate the simple interest of an investment.
She also included another case, with the interest rate set to a simple interest rate of 6%, and determined the corresponding future values of the same deposit after the same period.
For each future Value, change the n Value to get the corresponding future values.
Since there is no function to estimate the future Value after several years.
Use the reference cells to estimate values, as shown in the slide image.
We have a present Value of $1000 and an interest rate of 6%, so the equation is Future Value at Time (t): Present Value(1+i%n).
Place the present Value in cell $D$4 as a reference cell. Place the simple interest rate i% in cell $h$4; n is the Time, with a column from t=0 to t=10 (C4 to C14). Please refer to the Table in the next slide image.
The equation can be written as D5 = $D$4*(1 + $h$4*(c3)). Or the future value after one year=present value*(1+i%*1)=1000*(1+0.06*1)=1060.
The equation can be written as D5 = $D$4 (1 + $h$4 (c3)). Or, the future Value after one year = present Value(1 + i%1) = 1000(1 + 0.061) = 1060. While for n=3, the future Value for a simple interest of 6% will be 1000*
(1+0.06*3)=1180.
How to estimate compound interest on an investment? First method.
For the compound interest part 2. To estimate the future Value of an investment with compound interest. We can prepare columns for the Time range from 0 to 10 in column H, from H5 to H15.
For the future Value, I used column I from I5 to I15. I entered the present Value in H5 as 1000. In our example, the interest rate is F5 = 6%.
The future Value after one year can be written as =$I$5*((1+$F$5)^H6). The future Value after one year can be written as $I5*((1+$F5)^H6). The future Value after two years can be written as $I5*((1+$F5)^H7).
The future Value of $1000, with 6% compounded yearly, is 1000(1+0.06) ^1 = 1060
Value is the future Value after one year.
The future Value after two years = 1000(1+0.06)^2 = 1123.60. The future Value after five years = 1000 (1+0.06) ^5 = 1338.23.
The futureValuee after 10 years = 1000*(1+0.06) ^10 = 1790.85. Please refer to the right-side Table in the next slide image.
This is the assigned function for estimating compound interest. As we can see in the
next slide image, we have FV(rate, nper, PV,(type)) from which we can estimate the compound interest.
How to estimate the compound interest of an investment- Excel built-in function.
I have prepared an Excel sheet in which I have listed the following:
1-present Value =D5=1000.The interest rate = D6 = 6%. Terms in years: 2 years = D7 = 2.
Terms in years: 2 years = D8 = 5. Terms in years: 2 years = D9=10.
We will apply this to obtain future values for 2, 5, and 10 years and compare these with the values we previously obtained.
To use the built-in Excel formula, please refer to the Excel sheet. Fv after 2 years=FV($D$6%,D7,,-D5).
Fv after five years=FV($D$6%,D8,,-D5).
Fv after ten years=FV($D$6%,D9,,-D5). The values matched the previously estimated future values.
This is a List of terms used to estimate future values and present values for investments.
PW is the present worth.
PV is the present Value.
F is the future Value.
A is a series of consecutive payments.
You can download the PDF used to illustrate this Post from the button below.
The following Post title is ‘Cash Flow In and Out Diagram.’
Engineering Economy: Applying Theory to Practice is A good reference.