FINANCE AND GROWTH

Simple Interest
Hire Purchase Agreements
Compound Interest
Inflation
Population Growth
Exchange Rates
1
SIMPLE INTEREST
Interest is based only on the original
sum of money
Rand value of interest remains constant
Formula: A = P(1 + n.i)

A = Total Amount
P = Principle
i = Interest Rate (where )
n = Number of Years


100
_ int rate erest
i =
2
Example 1: R1500 is invested for 2 years at 18% per
annum (p.a.) simple interest.
Value of investment after 1 year:
A = R1500 + 18% of R1500
= R1500 + R270
= R1770

Value of investment after 2 years:
A = R1770 + 18% of R1500
= R1770 + R270
= R2040
Therefore value of interest remains constant.

Using the Simple Interest formula:
A = P(1 + i.n)
A = R1500(1 + 0,18 x 2)
A = R2040
3

P = R50 000 ; I = 0.16 p.a ; n = 18 years

a) A = P(1 + i.n)
A = R50 000 (1 + 0,16.18)
A = R194 000

b) Interest received
= A - P
= R194 000 R50 000
= R144 000.

Example 2: R50 000 is invested for 18 years at 16% p.a.
simple interest. Determine:
a) the value of the investment after 18 years
b) the simple interest earned after 18 years
4
A = R7000 ; n = 4 years ; i = 0.07

A = P(1+i.n)
R7000 = P(1 + 0,07 x 4)
R7000 = P(l + 0,28)
R7000 = P(1,28)



P = R5468,75
P
R
=
28 , 1
7000
Example 3: How much was invested 4 years ago if the
value of the investment is currently worth R7 000? The
interest rate was 7% p.a. simple interest.
5

A = R3000 ; P = R1600 ; n = 4 years

A = P(1 + i.n)
R3000 = R1600(1 + i.4)
R3000 = R1600 + 4800i
R3000 R1600 = 4800i
R1500 = 4800i
R1500 4800 = i
i = 0,3125
r = i x 100
= 0,3125 x 100
= 31,25%

Simple Interest Calculator

Example 4: R1 600 accumlates to R3 000 after 4 years.
Find the interest rate if the investment earned simple
interest.
6
EXERCISE
1. Sarah invests R5000 for 6 years at a simple interest
rate of 8% p.a. Determine:
(a) the future value of the investment.
(b) the simple interest received after 6 years

2. Kabelo invests R15000 for 15 years at a simple
interest rate of 8% per annum. Calculate:
(a) the future value of the investment.
(b) the simple interest received after 16 years



7
3. In 3 years time John wants to have saved R25 000 in
order to visit his cousin who lives in England. He
manages to receive an interest rate of 12% per annum
simple interest. How much must he invest now in
order to achieve his goal?

4. Sandesh wants to invest a sum of money now so as to
afford a new play station costing R5000, three years
from now. He receives a simple interest rate of 6%
p.a. Calculate how much Sandesh should invest?

5. Calculate how long it would take an investment of
R3900 to grow to a value of R5500 if the simple
interest rate received is 12% per annum.
8
6. Calculate how long it would take for an investment of
R5800 to double if the simple interest rate is 14% p.a.

7. In order for R5000 to grow to R10000 over a period of
5 years, what simpleinterest rate would you need to
secure?

8. Ronald has R5000 to invest and wishes to increase
this amount to R6000 over a period of 2, 5 years.
What simple interest rate will he need to receive in
order to achieve this?

9. An amount of R2000 is invested at 14% p.a. simple
interest. A further R1400 is invested at 12% p.a.
simple interest. By when will both investments have
the same accumulated values?

9
HIRE PURCHASE AGREEMENTS
A Hire Purchase Agreement (HP) is a short-
term loan. Furniture, cars and household
appliances, such as refrigerators, are
generally bought on HP.

Buyers sign an agreement with the seller to
pay a specified amount per month.

The interest paid on a hire purchase loan is
simple interest and it is calculated on the full
value of the loan over the repayment period.

Normally a deposit is paid initially and the
balance is paid over a short time period
10
Example 1:

Pumzile buys a DVD player for R7 800 .She takes
out a hire-purchase loan involving equal monthly
payments over 2 years. The interest rate charged
is 14, 5% per annum simple interest. She also
takes out an insurance premium of Rl0, 35 per
month, to cover the cost of damage or theft.

Calculate:
a) the actual amount paid for the DVD player.
b) the interest paid.
c) how much must be paid each month.

11
a) P = R7 800; n = 2 years (24 months); I = 14.5% p.a.

A = P(1 + i.n)
A = R7 800 [1 + (0, 145)(2)]
A = R10 062

b) Interest paid = A P
= R10 062 R7 800
= R2 262

c) The monthly loan repayments:
R10 062 24 months
= R419,25
Add in the monthly insurance premium,
the total amount to be paid each month is:
R419,25 + R10,35
= R429,60 p. m

12
Example 2:

Jo - Ann buys a laptop priced at R13 495. She
takes out a 12-month hire purchase agreement.
She pays a deposit of 20% and the interest
charged on the balance is 15% per annum simple
interest.

What will she actually pay for the laptop and what
will her monthly payments be?


13
Deposit :
= 0, 2 x R13 495
= R2 699
Balance on HP:
= R13 495 - R2 699
= R10 796
A=P(1+i.n)
A = R10 796(1 + 0, 15 x 1)
A = Rl2 415,40
Jo - Ann will actually pay :
R2 699 + R12 415
= R15 114 for the laptop.
Her monthly repayments will be:
R15 114 12
= R1 259,50 p. m

14
Example 3:
A car radio costs R960. Megan buys her car
radio on HP and agrees to pay a deposit of
Rl00 and 24 monthly repayments of R45 p.m.
Calculate:
(a) the total simple interest paid.
(b) the rate of simple interest.
a) Total amount paid:
= Rl00 + 24 x R45
= R1 180
Total interest paid:
= R1 180 R960
= R220

15
b) The 24 amounts of R45 that must be paid will add
up to R1 032, which is A, the final value.
The deposit of Rl00 is paid at the start of the HP, so
the balance (P) to be paid is therefore R860.

P = R860 ; A = R 1 080;
n = 24 months = 2 years ; i = ?

A = P (l + i.n)
R1 080 = R860(1 + i x 2)
R1 080 R860 = 1 + 2i
1,255813953 = 1 + 2i
1,255813953 1 = 2i
0.255813953 = 2i
0,2558139532 2 = i
r = 12,8 %

16
EXERCISE
1. Mpho buys a furniture suite for R9895. He takes out a
hire-purchase loan involving equal monthly payments
over five years. The interest rate charged is 15, 25%
per annum simple interest. He also takes out an
insurance premium of RI2 per month to cover the cost
of damage or theft. Calculate:
(a) the actual amount paid for the furnituresuite.
(b) the interest paid.
(c) how much must be paid each month.

2. Greg buys a laptop priced at R12 535. He takes out a
24-month hire purchase agreement. He pays a deposit
of 10% and the interest charged on the balance is
16,125% per annum simple interest. What will he
actually pay for the laptop and what will his monthly
payments be?

17
3. A play station 11 costs R4593. Daniel buys a play station
on HP and agrees to pay a deposit of R450 and 36
monthly payments of R150. Calculate the total simple
interest paid and the rate of simple interest.

4. A hire purchase contract for a sound system requires
OJ to pay a deposit of R550 and then make 6 monthly
payments of R 185. If the price of the sound system is
R1 401. Calculate the total simple interest paid and the
rate of simple interest.

5. Mr Sibanda bought a computer costing R22 253 on hire
purchase. He traded in an old computer for R2000 and
paid a deposit of R1500. The balance was paid by means
of monthly installments of RI 120,50 over two years.
Calculate the total simple interest paid and the rate of
simple interest.

18
COMPOUND INTEREST
Interest is based only on the original
sum of money plus the interest earned
Rand value of interest increases
Formula: A = P(1 + i)
n


A = Total Amount
P = Principle
i = Interest Rate (where )
n = Number of Years


100
_ int rate erest
i =
19
Example 1: R5500 is invested for 2 years at
5% per annum (p.a.) compound interest.
Value of investment after 1 year:



Value of investment after 2 years:




Therefore value of interest remains constant.
Using the Compound Interest formula:

5775
275 5500
5500 05 , 0 5500
R A
R R A
R R A
=
+ =
+ =
75 , 6063
75 , 288 5775
5775 05 , 0 5775
R A
R R A
R R A
=
+ =
+ =
75 , 6063
) 05 , 0 1 ( 5500
) 1 (
2
R A
R A
i P A
n
=
+ =
+ =
20



Interest received
= A - P
= R28 143,01 - R8000
= R20 143,01



Example 2: Petro invests R8000 for 9 years at
15%p.a. compounded annually. Find the final
value of her investment after 9 years and the
interest she receives.
01 , 28143
) 15 , 0 1 ( 8000
) 1 (
9
R A
R A
i P A
n
=
+ =
+ =
Calculate Compound Interest
21
Example 3: Jamy takes out a loan in order to
start his small car wash business. Three years
after granting the loan, he agrees to repay the
loan by means of a once off payment of R405
000. The bank charges him an interest rate of
23% p.a. compounded annually.
How much money did he borrow from the bank?

( )
49 , 217640
) 23 , 1 ( 405000
) 23 . 0 1 ( 405000
1
3
3
R P
P R
P R
i P A
n
=
=
+ =
+ =
22







Example 4: R4250 is invested for 6 years and
grows to R14 740. Find the interest rate if
interest is compounded annually.

( )
| |
% 03 , 23
230320023 , 0
1
4250
14740
1
4250
14740
) 1
4250
14740
) 1 (
4250
14740
) 1 ( 4250 14740
1
6
1
6
1
6
1
6
6
1
6
6
=
=
=
(

+ =
(

+ =
(

+ =
+ =
+ =
r
i
i
R
R
i
R
R
i
R
R
i
R
R
i R R
i P A
n
Graph of Compound
vs Simple Interest
23
EXERCISE
1. Find the end value of R1300 invested for
6 years at:
(a) 14, 78% p.a. compound interest.
(b) 18, 70% p.a. compound interest.

2. Find the present value of an amount which
accumulated to R2228,40 in 5 years at:
(a) 11, 86% p.a. compound interest.
(b) 12,73% p.a. compound interest.

3. Jana invests R100 500 in an account paying 17, 25%
p.a. compounded annually. Calculate the future value
of his investment after 18 years.

24
4. Patrick borrows money from a bank in order to
finance his new business. The bank charges him an
interest rate of 14,75% p.a. compounded annually.
Calculate the present value of the loan (the amount
he originally borrowed), if he pays off the loan 8
years from now with a payment of R500 000.

5. R6000 is invested for 5 years and grows to R9000.
Find the interest rate if interest is compounded
annually.

6. Find the annual compound interest rate that makes
R2500 double in 5 years.

7. R50 000 is invested at 10% p.a. simple interest for 3
years. Thereafter, the total amount is reinvested in a
different financial institution at 25% p.a. compound
interest for 2 more years. What is the future value of
the investment after the five-year period?

25
INFLATION
Inflation is the steady compounded
increase in prices over time throughout
the economy.


Example 1: A motorcar currently costs R800 000.
If the rate of inflation is 12% p.a. compounded
annually, how much will this car cost in 5 years
time?
35 , 1409873
) 12 . 0 1 ( 800000
) 1 (
5
=
+ =
+ =
A
A
i P A
n
26
Example 2: You decide to invest R50 000 now
and you secure an interest rate of 9% p.a.
Compounded annually. The inflation rate is
currently running at 12% p.a.

(a) What will the future value of your money be in
15 years from now?
(b) Due to inflation, what money will have the
same buying power as R50 000 in 15 years
time?
(c) By how much will the buying power of your
money have declined after 15 years?
(d) Had you rather secured an interest rate of 18%
p.a., by how much would the buying power
of your money have increased?



27

(a)


(b)



(c) The buying power of your money will have declined
by R273 678,29 - Rl82 124,12 = R91 554,17

(d)



The buying power of your money will have
increased by = R598 687,39 R273 678,29
= R325 009,10
12 , 182124
) 09 , 0 1 ( 50000
) 1 (
15
=
+ =
+ =
A
A
i P A
n
29 , 273678
) 12 , 0 1 ( 50000
) 1 (
15
=
+ =
+ =
A
A
i P A
n
39 , 598687
) 18 , 0 1 ( 50000
) 1 (
15
=
+ =
+ =
A
A
i P A
n
28
EXERCISE
1. Determine the value of your money if you invest
R2000 for 4 years. Inflation is at 7% p.a.

2. How much will a loaf of bread cost in 2 years time, if
it currently costs R10,80 and inflation is at 6% p.a.

3. If a TV costs R6 400 now and inflation is at 6.7% p.a.,
then how much will you pay for a TV in 5 years
time?

29
POPULATION GROWTH
The growth of a population is exponential, therefore
it is compounded year-on-year.
Example: At the start of a bacterial culture there are 5
organisms. How many organisms will be present in the
culture after 20 minutes, if the population grows at a
rate of 10% per minute?
33
64 , 33
) 10 , 0 1 ( 5
) 1 (
20
~
=
+ =
+ =
A
A
A
i P A
n
30
EXCHANGE RATES
Example: Mabel is on a trip to England to visit her
family. The current rand/pound exchange rate is
R12,50 to the British pound. She has R20 000 to spend
in England. How many pounds does she have to spend
in England?
1 = R12, 50 1 divided by R12, 50 =
0, 08 = R1
0, 08 20 000 = R1 20 000
1600 = R20 000
Mabel has 1600 to spend in England.

50 , 12
50 , 12 R

Remember! The higher the exchange rate, the

weaker the value of your money e.g. R8,50 : $1
31
EXERCISE
1. A DVD player costs $256 in California. What would it
cost in South Africa if the Rand/dollar exchange rate
is Rl0,45 to the US dollar?

2. You want to buy a book online costing 35 in
London. How much will it cost you in rand?
The rand/pound exchange rate is RI3 to the pound.

3. You want to buy a box of Japanese cigarettes
costing 50 yen. If the rand/yen exchange rate is one
rand to 16, 78 yen, then calculate the cost of the
sweets in rand.


32
4. Andrew is visiting a friend in New York for a week.
He has R2500 to spend and will exchange the money
for US dollars. How many dollars will he have to
spend if the rand/dollar exchange rate is R10, 38 to
the US dollar?

5. Sandesh wants to purchase an electric guitar from a
music dealership in London. The guitar costs 3000
and Sandesh has saved R40 000. The rand/pound
exchange rate is R13, 24 per one pound. Will he have
enough money, in rand, to buy this guitar?

6. One yen costs R0, 22. How much yen can you spend
in Japan if you have R3000 available to you?

7. A certain watch costs 350 in Germany or 245 in
England. Which price is better for the South African
buyer if the exchange rates are R9, 24 to the euro
and R12, 06 to the pound?


33