A major drug company anticipates that in future years it could be involved in li

Question

A major drug company anticipates that in future years it could be involved in litigation regarding perceiving side effects of one of its antidepressant drugs. In order to prepare a "war chest," the company wants to have $50 million available 6 years from now. The company expects to set aside $6 million the first year and uniformly increasing amounts in each of the next 5 years. If the company can earn 12% per year on the money it sets aside, by how much must it increase the amount set aside each year to achieve its goal of $50 million at the end of 6 years?

Explanation / Answer

Let $ 'x' million be the increase in amount to be set aside.

Amount = Principal * ( 1 + rate/100 )^T

50 = 6*(1.12)^5 + (6+x)(1.12^4) + (6+2x)(1.12^3) + (6+3x)(1.12^2) + (6+4x)(1.12^1) +(6+5x)(1.12^0)

Million is common and gets cancelled from both the sides of equation.

50 = 48.69 + 17.62x

x = $0.0743million = $ 74,300

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