Continuous Compounding

Data: Principal (P) Interest rate (i) Time/ Term (n) = Rs. 100,000 = 10% = 10 years

Required: a) Calculate the Future Value (FV) when investment is made in continuous compounding product. b) Calculate the Future Value (FV) when investment is made on daily compounding product. c) Give your decision which is the better option. Solution: a) FV = P x e i n = Rs. 100,000 x e 10% x 10 = Rs. 100,000 x 2.71828 10% x 10 = Rs. 100,000 x 2.71828 = Rs. 271,828.18

b) FV = P x (1 + i) n = Rs. 100,000 x 1 + 10% 365

10 x 365

= Rs. 100,000 x ( 1 + 0.027397% ) 3650 = Rs. 100,000 x ( 1.00027397 ) 3650 = Rs. 100,000 x 2.717909 = Rs. 271,790.96 Decision: Option A is comparatively better because it will provide a higher Future Value as compared to Option B. The marginal benefit will be Rs.37.22 by opting Option A.