You would like to buy a retirement home in Florence, Italy in 4 years. The type...

You would like to buy a retirement home in Florence, Italy in 4 years. The type of home you want to buy currently costs $568,706, but you expect the price to rise at 3% per year for the next 4 years.

If your investments earn 6.14% APR compounded annually (nominal), how much do you have to invest in years 1 to 4 to be able to purchase your retirement home?

Expert Solution

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Future value of home=568,706*(1.03)^4

=568,706*1.12550881

=$640083.613

Future value of annuity=Annuity[(1+rate)^time period-1]/rate

640083.613=Annuity[(1.0614)^4-1]/0.0614

640083.613=Annuity*4.38371132

Annuity=640083.613/4.38371132

=$146014.09(Approx)

jeff jeffy answered 2 years ago

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