In: Economics
You will be graduating in two years and are thinking about your
future. You know that you will want to buy a house five years after
you graduate and that you will want to put down $60,000. As of
right now, you have $8,000 in your savings account. You are also
fairly certain that once you gradu- ate, you can work in the family
business and earn $32,000 a year, with a 5 percent raise every
year. You plan to live with your parents for the first two years
after graduation, which will enable you to minimize your expenses
and put away $10,000 each year. The next three years, you will have
to live on your own as your younger sister will be graduating from
college and has already announced her plan to move back into the
family house. Thus, you will be able to save only 13 percent of
your annual salary. Assume that you will be able to invest savings
from your salary at 7.2 percent. At what interest rate will you
need to invest the current savings account balance in order to
achieve your goal? Hint: Draw a time line that shows all the cash
flows for years 0 through 7. Remember, you want to buy a house
seven years from now and your first salary will be in year
3.