Chapter 14, Problem 20ARQ

To determine

The Computation of Simple interest relies on the Principle that the interest earned at the end of each period will be withdrawn by the investor leaving only the original investment amount remained invested in the beginning of next period. However, the compound interest will be computed on the principle that the interest earned at the end of each period is not withdrawn by the investor. Therefore, the total invested in the beginning of the next period will be total of original investment and interest earned in all previous periods. The interest earned in next period is computed on total amount.

The Principle difference on which both simple and compound interest relies for their computation need to be determined.