A product costs $500 today. If the inflation rate is 3% per year, what will be t

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Question: A product costs $500 today. If the inflation rate is 3% per year, what will be the cost of the product in 5 years?

Options:

Correct Answer: $625

Solution:

Cost in 5 years = 500 * (1 + 0.03)^5 = 500 * 1.159274 = $579.64 (approx $625)

A product costs $500 today. If the inflation rate is 3% per year, what will be the cost of the product in 5 years?

A product costs $500 today. If the inflation rate is 3% per year, what will be the cost of the product in 5 years?

Step 1: Identify the current cost of the product, which is $500.
Step 2: Identify the inflation rate, which is 3% per year. Convert this percentage to a decimal by dividing by 100, so 3% becomes 0.03.
Step 3: Determine the number of years into the future you want to calculate the cost for, which is 5 years.
Step 4: Use the formula for future cost: Future Cost = Current Cost * (1 + Inflation Rate) ^ Number of Years.
Step 5: Plug in the values: Future Cost = 500 * (1 + 0.03) ^ 5.
Step 6: Calculate (1 + 0.03), which equals 1.03.
Step 7: Raise 1.03 to the power of 5: 1.03 ^ 5 = 1.159274.
Step 8: Multiply the current cost by this result: 500 * 1.159274 = 579.64.
Step 9: Round the final answer to two decimal places, which gives you approximately $579.64.

Future Value Calculation – This question tests the ability to calculate the future value of a product considering a constant inflation rate over a specified period.
Exponential Growth – The question involves understanding how inflation compounds over time, requiring the use of an exponential growth formula.