Finor Traps manufactures an innovative mouse trap. Total sales for the current year is $325,000. The company expects its sales to go up to $500,000 in five years. What is the expected growth rate in sales for this firm

9%

Explanation:

to calculate the compounding growth rate we can use the future value formula:

future value = present value x (1 + r) ⁿ

future value = $500,000 present value = $325,000 r = growth rate compounded yearly = ? n = 5 years

$500,000 = $325,000 x (1 + r) ⁵

(1 + r) ⁵ = $500,000 / $325,000 = 1.53846

1 + r = ⁵√1.53846 = 1.08997

r = 1.08997 - 1 = 0.08997 or 8.997%≈ 9%

Even though the present value formula is used to calculate compounding interest rate, it can also be used to calculate compounding growth rate.

Using equation

F=P (1+i) ^n

n=5

F=500,000

P=325,000

500,000=325,000 (1+i) ^5i

i=8.99%