Final answer:
Simple interest is calculated solely on the principal amount, while compound interest involves the principal plus accumulated interest. Compound interest is crucial for assessing interest on both the initial investment and earned interest over time, resulting in higher returns.
Explanation:
Simple interest is an interest rate calculation only on the principal amount, calculated using the formula Total future amount (with simple interest) = Principal + (Principal × Rate × Time).
Compound interest is an interest rate calculation on the principal plus the accumulated interest, determined by the difference between the future value and the present value of the principal.
Compound interest is important because it allows for the calculation of interest not just on the initial investment but also on the interest that accumulates over time, leading to greater returns compared to simple interest.
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