The current cost of a retirement home in Westbrook Manor Estates is shown below
ID: 2651628 • Letter: T
Question
The current cost of a retirement home in Westbrook Manor Estates is shown below as present value. Inflation is expected to cause this price to increase at a rate of r percent per year, over the next n years, before Chris O'Neal retires. How large an equal, annual, end-of-year deposit must he make into an account paying an annual interest rate of i for him to have the cash to purchase a home at retirement?
PV is 70000
r% is 4% inflation per year
i% is 13% interest per year
n = 30
Solve for FV and how much would be annual deposit
Explanation / Answer
True rate = Interest rate - Inflation rate
= 13%-4% i.e 9%
Future value = Present value ( 1+R)^N
=70000(1+0.09)^30
= 70000*13.268 i.e 928760
Annual deposit = 70000*5%*(1+0.09)^30/(1+0.09)^30-1
= 3500*13.268/12.268
= 3785.30
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