You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save $5,000 at

Question

You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save $5,000 at the end of the first year, and you anticipate that your annual savings will increase by 10% annually thereafter. Your expected annual return is 7%. How much will you have for a down payment at the end of Year 3?

Help In Homework · Accepted Answer

Increase the cash flow by 10% for 3 years, and calculate the future value at the end of year 3 for each of the cash flows. Cash flow at end of year 1 5000 Cash flow at end of year 2 5000*(1.1) Cash flow at end of year 2 5500 Cash flow at end of year 3 5500*(1.1) Cash flow at end of year 3 6050 Future Value = cash flow*((1+r)^t) where r is the interest rate that is 7% and t is the time period in years. Year 1 2 3 t 2 1 0 cash flow 5000 5500 6050 future value at end of year 3. 5724.5 5885 6050 sum of future values 17659.5 You will have $17659.5 for the downpayment of the house at the end of year 3.

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You want to buy a house within 3 years, and you are currently saving for the down payment

Expert Solution

Archived Solution

Increase the cash flow by 10% for 3 years, and calculate the future
value at the end of year 3 for each of the cash flows.
Cash flow at end of year 1	5000
Cash flow at end of year 2	5000*(1.1)
Cash flow at end of year 2	5500
Cash flow at end of year 3	5500*(1.1)
Cash flow at end of year 3	6050

Future Value = cash flow*((1+r)^t)
where r is the interest rate that is 7% and t is the time period in years.

Year	1	2	3
t	2	1	0
cash flow	5000	5500	6050
future value at end of year 3.	5724.5	5885	6050
sum of future values	17659.5

You will have $17659.5 for the downpayment of the house at the end of year 3.