Chapter 1 Compound Interest: The Power of Money

Money and time are directly and inescapably related. This means that the longer money is left on deposit, the more it earns (or, the longer it takes to repay a loan, the more it costs). Although this concept—that the benefit or cost of money increases over time—is easily explained but not always universally understood. This chapter explains how the time value of money works and provides formulas for calculating interest in various ways.

In the calculation of interest cost, time is the most critical element, even more so than the rate. These two factors—time and rate—define the true “cost of money.” When an organization borrows money through working capital loans, equipment financing, or for any ...

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