Question

"Happy Family" plans to buy a house in four years. Experts in this area have estimated that the cost of real estate will increase at a rate of 7% per year during that period. This family can make investments that give them a 12% return. If the economic predictions are valid,

a. How much will they have to pay for a house that now costs $ 150,000?

b How much will they have to deposit monthly so that after those four years they can buy it?

Answer 1

a). Value of house in 4 years = Current Value of house * (1 + g)⁴

= $150,000 * (1 + 0.07)⁴ = $150,000 * 1.3108 = $196,619.40

b). Monthly Deposit = [Amount needed in future * r] / [(1 + r)ⁿ - 1]

= [$196,619.40 * (0.12/12)] / [{1 + (0.12/12)}^(4*12) - 1]

= $1,966.19 / 0.6122

= $3,211.55