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Question 1207544: Momin plans to buy a house on cash instead of paying mortgage. He plans to set aside $14400 at the end of each year for 15 years. He puts his savings in a Tax Free Savings Account (TFSA) and invests them in a high risk mutual fund, which has traditionally earned 12.2% annually. Money decreases in value by 2.5% per annum as well. How much will Momin have saved after 15 years?
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! note:
this answer has been revised from the original answer provided earlier.
the difference has to do with the interpretation of the effects of inflation on the value of your money.
the interpretation used here is as follows:
if the inflation rate is 2.5% per year, then what cost 1 dollar today will cost 1.025 dollars next year.
1 dollar was enough to buy the item this year, but because of inflation, 1 dollar can only buy 1/1.025 = .9756097561 of the item next year.
therefore, your dollar is only worth .9756097561 dollars next year.
the year after next year, it will only be worth .9756097561 / 1.025 = .9518143962 dollars, or 1/1.025^2 dollars.
when using the arachnoid calculator at https://arachnoid.com/finance/, this growth factor is converted to the percent form required by that calculator.
the growth factor of .9756097561 has 1 subtracted from it and it is then multiplied by 100 to get -2.43902439%
that's the inflation interest rate used by the calculator when converting the value of future dollars to the value of those dollars today.
the results of using that calculator are shown below.
the first result is finding the future value without taking into account the effects of inflation.
the second result is providing the future value after taking into account the effects of inflation.
note that 376,683.91 is the same as taking 545,550.62 and dividing it by 1.025 ^ 15.
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