Question

Susan gets a job upon completion of her MSME degree with a mechanisms design firm. her starting salary is $79,000: each successive year she gets a 5% raise. Assuming she deposits 10% of her salary each year into a fund earning 8% interest, how much money will she have in 10 years to donate to her university?

(a) $139,575

(b) $115,101

(c) $151,501

(d) $110,551

Answer 1

Salary in the first year = 79,000

The salary will increase by 5% every year

Susan will deposit 10% of the salary in a fund.

Deposit will be 10% of 79,000 = 7,900

As the salary increases by 5%, the amount deposited in the fund also increases by 5%

Interest = 8%

Calculate the Future Value.

Step 1

Calculate the Present Value

Use the geometric gradient formula to calculate the PW.

Present Value = A1 [1 – (1+g) ^N (1+i) ^–N ÷ i – g]

Present Value = 7,900 [1 – (1 + 0.05) ¹⁰ (1 + 0.08) ^–10 ÷ 0.08 – 0.05]

Present Value = 64,650

Step 2

Now calculate the Future value at the 10^th year

FV = 64,650 (1 + 0.08) ¹⁰ = 139,574.5 or take it as 139,575

Answer – (a) $139,575