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CMA Foundation · Fundamentals of Business Mathematics and Statistics · Arithmetic Progression and Geometric Progression

A company's annual profit was Rs 5,00,000 in year 1 and grows each year by a constant ratio. If the profit in year 3 was Rs 7,20,000, what was the profit in year 4?

Profit follows a geometric progression. Since 5,00,000 x r squared equals 7,20,000, r squared is 1.44 and the ratio is 1.2. The fourth-year profit is therefore 7,20,000 x 1.2, which equals Rs 8,64,000.

  1. ARs 8,64,000Correct
  2. BRs 8,20,000
  3. CRs 9,00,000
  4. DRs 8,40,000

Explanation

For a GP, ar^2 = 7,20,000 with a = 5,00,000, so r^2 = 1.44 and r = 1.2. Year 4 = 7,20,000 x 1.2 = Rs 8,64,000. Adding the year 2-3 difference (an AP view) would be a wrong method.

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