Task 1.

1) Selection of option based on the maximum savings:

Simple interest is that interest which is calculated as well as paid on the original amount of the
investment while compound interest is that interest which is calculated on the principal at beginning of
the period and then subsequently on the balance of statement of financial position by adding the
previous balances.

1)Decision Regarding Selection of Option Description Values

Simple Interest
Principal Value 40000
Simple Interest Rate 6%
No Of Years 15
Simple Interest Sum =Principal Value(1+ Interest Rate Sum Or Future Value in
*No of years to be invested) Simple Interest 76000

Compound Interest
Principal Value 40000
Simple Interest Rate 5.00%
No Of Years 15

Future Value in Compound Interest=Principal

Value*((1+Interest rate)^No of years) Sum 83157.1272

In accordance with the amounts calculated above, sum or future value of the Compound interest is
selected despite of lower interest rate as it is more economical.

2)

In accordance of this situation, if the investor has to with draw the balance before the completion of the
maturity then he has to select the option of simple interest because it is more economical generation
more cash flows.

Difference of simple interest=56800-56284

Extra Amount can be earned = 516 Euros

Simple Interest Description Values

  Principal Value 40000
  Simple Interest Rate 6%
  No Of Years 7
Simple Interest Sum =Principal Value(1+ Interest Rate Sum Or Future Value in
*No of years to be invested) Simple Interest 56800
     
Compound Interest    
  Principal Value 40000
  Simple Interest Rate 5.00%
  No Of Years 7
     

Future Value in Compound Interest=Principal

Value*((1+Interest rate)^No of years) Sum 56284.0169

3)

Simple interest is an amount that is calculated on the principal amount in beginning as well as
subsequently of the period therefore this amount remain fixed whole of the period but Compound
interest is an amount that is calculated on the principal amount in beginning and subsequently on
the amount calculated by adding the principal amount with the interest earned of the period
therefore this amount increased progressively whole of the period from the smaller stage to the
apex.