A beach house in Southern California now costs $350,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 20 years before Eric and Karinna retire from successful careers in commercial art. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement?

Question

Quizplus · Accepted Answer

To find the future price of the beach house, calculate $350,000 * (1.05)^20. Then, use the future value of an annuity formula to find the annual deposit needed to reach that future price, given an interest rate of 13%. The correct calculation results in an annual deposit of approximately $11,472.

A Beach House in Southern California Now Costs $350,000