Twenty years from now, you would like to purchase a cottage located on the shores of...

Twenty years from now, you would like to purchase a cottage located on the shores of your favourite lake. You expect that you will have $250,000 available at that time for this purchase. You could afford a home that is currently selling for ____ if the homes increase in value by 3% annually, but if the homes increase in value by 5% annually, you can only afford a home priced at _____ today.

Expert Solution

	Present value of money:	=	FV/ (1+r) ^N
Input

FV	Future value	FV=	$ 250,000
I	Rate of inflation	r=	3%

N	Number of years	N=	20

PV	Present value	=	250000/ (1+0.03)^20
PMT not applicable	=	$ 138,418.94

If inflation is 3% then home affordable value today is $138,418.94

	Present value of money:	=	FV/ (1+r) ^N
Input

FV	Future value	FV=	$ 250,000
I	Rate of inflation	r=	5%

N	Number of years	N=	20

PV	Present value	=	250000/ (1+0.05)^20
PMT not applicable	=	$ 94,222.37

Answer is $94,222.37 when inflation is 5%

jeff jeffy answered 2 years ago

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