You are interested in buying a piece of real property that could be worth $300,0

Question

You are interested in buying a piece of real property that could be worth $300,000 in 10 years. Assuming that your money is worth 8%, how much would you be willing to pay for the property now? A man is planning to retire in 25 years. He wishes to deposit a regular amount every three months until he retires, so that, beginning one year following his retirement, he wiII receive annual payments of $80,000 for the next 15 years. How much must he deposit if the Interest rate is 6% compounded quarterly? You have $10,000 available for investment in stock. You are looking for a growth stock whose value can grow to $35,000 over 5 years. What kind of growth rate are you looking for?

Explanation / Answer

In 10 years property is worth 3 lacs

FV = P(1.08)10

Present value at 8% rate is 138958.05

Hence willing to invest 138958.05

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If he deposits 300 per quarter regularly (say) for 35 years he would have a lump sum of 144613.82

For 15 years annual payment of 80000 lump sum should be 743598.71

Hence instead of 300, he must deposit quarterly an amount of 300*743580.71/144613.82

=1542.55

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10000 should become final amount as 35000 in 5 years

i.e. 35000 = 10000(1+r/100)5

5 ln (1+r/100) = ln 3.5

r = 28.4% compounded annually

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