Question

After graduating from college, several friends started a small business that immediately became

successful. When the business was established, the partners determined that 10% of the profits

will be continuously invested each year. In the first year, the company posted a profit of $389 000.

Determine the income stream flow rate for the investments over the next several years if:

(a) The business’s profit remains constant.

(b)The profit grows by $40000 each year.

(c)The profit increases by 19% each year.

Answer 1

(Since it is not specified for how many years, we are making a table for 5 years only)

INCOME STREAM FLOW OF INVESTMENTS

Year	(a) Constant profit	(b) Profit growth by $40000 annually	(c) Profit increase by 19% annually		10% of (a) invested	10% of (b) invested	10% of (c) invested
1	$389000	$389000	$389000		$38900	$38900	$38900
2	$389000	$429000 ($389000 + $40000)	$462910 ($389000 + 19% of 389000)		$38900	$42900	$46291
3	$389000	$469000 ($429000+ $40000)	$550862.9 ($462910+ 19% of $462910)		$38900	$46900	$55086
4	$389000	$509000 ($469000+ $40000)	$655526.85 ($550862.9+ 19% of $550862.9)		$38900	$50900	$65553
5	$389000	$549000 ($509000+ $40000)	$780076.95 ($655526.85+ 19% of 655526.85)		$38900	$549000	$78008