A trader can either lend ₹50000 for 2 years at 8% per annum compounded annually, or hand it over for a flat fee of ₹8500 for the two years. Which brings in more, and by how much?

After year 1, interest is added to principal — so year 2's interest is calculated on a LARGER amount, not the original.

**$A=P\times (1+R/100{)}^T$**, where A is the final amount after $T$ years.
**CI = $A-P$** (the total interest earned).

Example: ₹2000 at 5% for 3 years, compounded annually:
- Year 1: $2000\times 1.05=2100-$ Year 2: $2100\times 1.05=2205-$ Year 3: $2205\times 1.05=2315.25$

Direct formula: $A=2000\times (1.05{)}^3=2315.25$. CI = 2315.25 − 2000 = 315.25 (vs SI of 300 — compound gives more).