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Theory of interest and decision-making concept

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Describe the theory of interest and discuss the decision-making concept it how it applies to analyzing cost and return on long-term investment.

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This solution describes the theory of interest and discuss the decision-making concept and how it applies to analyzing cost and return on long-term investment.

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A dollar received today is worth more than a dollar received a year later. This is true because if one puts one dollar in the bank now, the dollar will earn interest and the investor will obtain more than a dollar in one year. "Since dollars today are worth more than dollars in the future, cash flows that are received at different times must be weighed differently" (Brewer, Garrison & Noreen, 2007, p. 520). The interest that banks give to investors is expressed in percentages and may be offered annually or semi-annually. The initial amount that investors put in the bank is called the principal amount and is usually denoted by the letter P (Anonymous, n.d, p. 2). The sum of the principal amount and any earned interest is referred to as the compound amount denoted by P1. The relationship between the compound ...

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  • Bachelor of Science , Berea College
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