If inflation is 6% a year compounded annually, what will it cost in 21 years to buy a house currently
valued at $230,000? Round to the nearest cent.
Present value = 230,000
Inflation rate, r = 6% p.a.
Period, n = 21
Future value
= present value * (1 + r)n
You should have no problem proceeding from here.
rrtr
To find the future cost of the house, we need to calculate the compound interest over 21 years. Here's the step-by-step process to get the answer:
Step 1: Convert the inflation rate to decimal form:
The inflation rate is given as 6%. To convert it to decimal form, divide it by 100:
6% ÷ 100 = 0.06
Step 2: Calculate the future cost using the compound interest formula:
The compound interest formula is given by: Future Value = Present Value × (1 + Interest Rate)^(Number of Years)
Present Value = $230,000 (current value of the house)
Interest Rate = 0.06 (inflation rate converted to decimal)
Number of Years = 21
Future Cost = $230,000 × (1 + 0.06)^21
Step 3: Calculate the future cost using a calculator:
Using a calculator, we can simplify the expression in parentheses and calculate the final result:
Future Cost = $230,000 × (1.06)^21
The future cost rounded to the nearest cent will be the final answer.