Question

Today, you earn a salary of $75,500. What was your annual salary be five years ago if you receive annual raises of 3.6%?

Select one:

a. $62,230

b. $62,844

c. $58,213

d. $63,263

e. $63,441

Answer 1

Answer is d. $63,262

This question applies time value of money concept. According to time value of money concept:

FV = PV * (1 + r)ⁿ

where FV is Future Value

PV is Present Value

n is the number of periods

r is the periodic rate of interest.

Now, in our question, r = 3.6%, n = 5, FV = $75,500, PV = ?

PV = $63,262.77 = $63,263

---------------------------------------------------------------------------------------------------------------------

P.S: You actually don't even need to apply or know time value of money to solve this question. It is pure mathematics.

Let Salary 5 Years Ago be x

Then Salary 4 years ago would be x * (1 + 3.6%)

Then Salary 3 years ago would be x * (1 + 3.6%) * (1 + 3.6%)

Then Salary 2 years ago would be x * (1 + 3.6%) * (1 + 3.6%) * (1 + 3.6%)

Then Salary 1 years ago would be x * (1 + 3.6%) * (1 + 3.6%) * (1 + 3.6%) * (1 + 3.6%)

Then Salary today would be x * (1 + 3.6%) * (1 + 3.6%) * (1 + 3.6%) * (1 + 3.6%) * (1 + 3.6%).

But salary today is $75,500 as given in question.

So, 75,500 = x * (1 + 3.6%) * (1 + 3.6%) * (1 + 3.6%) * (1 + 3.6%) * (1 + 3.6%)

or 75,500 = x * (1 + 3.6%)⁵

x = $63,262.77