Geraldo’s current salary is $40,000 per year. His annual pay raise is always a percent of his salary at the time. What would his salary be if he got four consecutive 4% increases?
a.
$46,794.34
c.
$43,328.04
b.
$52,697.23
d.
$62,156.12

Question

Geraldo’s current salary is $40,000 per year.  His annual pay raise is always a percent of his salary at the time.  What would his salary be if he got four consecutive 4% increases?
a.
$46,794.34
c.
$43,328.04
b.
$52,697.23
d.
$62,156.12

cruffo · Answer

You can solve this problem using a series of calculations

New Salary = Old Salary + %increase * Old Salary
Recall that 4% = 0.04 as a decimal number

Salary0 = 40,000
Salary1 = 40,000 + 0.04(40,000)   <-  First increase
Salary2 = Salary1 + 0.04(Salary1)   <-  second increase
Salary3 = Salary2 + 0.04(Salary2)  <- third increase
Salary4 = Salary3 + 0.04(Salary3)  <- forth increse

cruffo · Answer

This is basically the same as annual compound interest A = P(1+r)^t

$40,000  at 4% compounded annually for 4 years. 
P = 40000    r = 0.04    t = 4
A = 40000(1 + 0.04)^4