A sum of $10,000 is deposited in a bank. Consider two situations: the bank offers an annual rate of interest of 10% and the bank offers an annual rate of interest of 15%. Compare the time value of money generated in both cases after:
a) one year.
b) five years.
a) At a rate of interest of 10% per annum, future value of $10,000 after a year is: $11,000. Hence, time value of money is: $11,000 - $10,000 = $1,000.
At a rate of interest of 15% per annum, future value of $10,000 after a year is: $11,500. Hence, time value of money is: $11,500 - $10,000 = $1,500.
b) At a rate of interest of 10% per annum, future value of $10,000 after five years is: $16,105.1. Hence, time value of money is: $16,105.1 - $10,000 = $ 6,105.1.
At a rate of interest of 15% per annum, future value of $10,000 after five years is: $20,113.57. Hence, time value of money is: $20,113.57 - $10,000 = $10,113.57.
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