Exponential Discount Sample Question

Question

The average going rate to get your 9 year old brother to eat an incredibly nasty looking bug is $5.00, but you have noticed that over the last three years this cost has increased amazingly by a consistent 40% annually. Supposing that your brother will continue to eat bugs if the price is right, what will it cost to get him to eat an equally nasty looking bug at his wedding when he is 26 years old.

Answer

First obtain the appropriate equation.

F = P (1 + i)N, where
F = Future Worth (or in this case future cost)
P = Present Worth (again this case is present cost)
i = interest rate
N = number of years

Second extract the important information from the question

P = $5.00
i = 40% = 0.40
N = 26 - 9 years = 17 years

Solve

F = 5.00 (1 + 0.40)17
F = $1,524.57

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