Question 1039982: Hi
sam is currently paid an allowance of 500 dollars per year.his father gives him a choice of a 3 percent rise now or a 1 percent rise now, a 2 percent rise in a years time and then a 3 percent rise in 2 years time.
what is the best choice to earn him the most money after 3 full years.
Thanks
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! here's the yearly breakout.
3% now 1% now 2% in a year 3% in two years.
first year 515 505
second year 515 515.1
third year 515 530.553
fourth year + 515 530.553
his cumulative earnings are:
first year 515 505
second year 1030 1020.1
third year 1545 1550.653
fourth year 2060 2081.206
fifth year 2575 2611.759
in the long run, he's better off getting 1%, then 2%, then 3%, because the cumulative earnings will be greater the longer he gets the allowance.
in the short run, the 3% right away looks better.
it really depends on how long he'll be earning the allowance.
if for only two years, then the 3% right away looks better.
if for 3 years or more, then the 1% followed by 2% followed by 3% looks better.
after 3 full years, he will have more cumulative earnings with the 1% followed by 2% followed by 3%, so that looks like the better option.
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