Question

A financial company uses a 5% rate of return today and expects that this rate of return will increase by one percentage point in each of the next nine years. How much is today’s sum of $100,000 worth to this company ten years from now?

Answer 1

Percentage point means 1% in each case. Since it is increased, it should be added with the existing 5% rate.

The calculation is as below:

0 Year = 100,000

1^st year = 100,000 × 1.05 = 105,000

2^nd year = 105,000 × 1.06 = 111,300

3^rd year = 111,300 × 1.07 = 119,091

4^th year = 119,091 × 1.08 = 128,618.28

5^th year = 128,618.28 × 1.09 = 140,193.92

6^th year = 140,193.92 × 1.10 = 154,213.31

7^th year = 154,213.31 × 1.11 = 171,176.78

8^th year = 171,176.78 × 1.12 = 191,717.99

9^th year = 191,717.99 × 1.13 = 216,641.33

10^th year = 216,641.33 × 1.14 = 246,971.12

Answer: 246,971.12