Question

The current cost of liability insurance for a consulting firm is $65,000 per year. If the cost is expected to increase by 4% each year, what will be the cost 5 years from now? Interest rate is 4%.

Answer 1

To calculate the cost of liability insurance after five years with a 4% annual increase, the future value formula is used resulting in an approximate cost of $79,082.44.

Step-by-step explanation:

The student's question involves a future value calculation based on a percentage increase, which is a common problem in mathematics, particularly involving finance and algebra. To find the cost of liability insurance for the consulting firm five years from now, we will use the formula for compound interest:

FV = PV (1 + r)^n

Where:

• FV is the future value of the insurance cost
• PV is the present value or current cost of the insurance, which is $65,000
• r is the interest rate (or growth rate, in this case), which is 4% or 0.04
• n is the number of years, which is 5

Substituting the values into the formula, we get:

FV = $65,000 (1 + 0.04)^5

Performing the calculations, we have:

FV = $65,000 (1.04)^5


FV = $65,000 (1.2166529024)


FV = $79,082.4386

The cost of liability insurance for the consulting firm, after five years accounting for a 4% annual increase, will be approximately $79,082.44.