Question

Which is the bigger factor in time value of money calculations, TIME or INTEREST rate? Try out a couple examples at say 3, 5, 10 years and 3, 5, 10 % interest on $10,000. Which was the biggest effect?!

Answer 1

In time value of money calculation, both time and interest rate plays an important factor. Greater the interest rate, greater will be the return on the capital. Again, time is also an important factor as longer the time duration, greater the time for the amount to generate return.

a. 3 Years @ 3% pa

= Principal (1+interest in decimal)^{(Time duration)}

= 10,000 (1.03)³

= 10,927.27

b. 3 Years @ 5% pa

= Principal (1+interest in decimal)^{(Time duration)}

= 10,000 (1.05)³

= 11,576.25

c.

3 Years @ 10% pa

= Principal (1+interest in decimal)^{(Time duration)}

= 10,000 (1.1)³

= 13,310

d.

5 Years @ 3% pa

= Principal (1+interest in decimal)^{(Time duration)}

= 10,000 (1.03)⁵

= 11,592.74

e.

5 years @ 5%

= Principal (1+interest in decimal)^{(Time duration)}

= 10,000 (1.05)⁵

= 12,762.81

f.

5 years @ 10%

= Principal (1+interest in decimal)^{(Time duration)}

= 10,000 (1.10)⁵

= 16,105.10

g.

10 years @ 3%

= Principal (1+interest in decimal)^{(Time duration)}

= 10,000 (1.03)¹⁰

= 13,439.16

h.

10 years @ 5%

= Principal (1+interest in decimal)^{(Time duration)}

= 10,000 (1.05)¹⁰

= 16,288.95

i.  

10 years @ 10%

= Principal (1+interest in decimal)^{(Time duration)}

= 10,000 (1.10)¹⁰

= 25,937.42

Thus, it can be seen that 10 years time period at the rate of 10% has the biggest effect.

Therefore, it can be concluded that both time and interest are important factor in time value of money calculations.