SOLUTION: Find the cost of a home in 20 years, assuming an annual inflation rate of 2%, if the present value of the house is $260,000. (Round your answer to the nearest cent.)

Click here to see ALL problems on Finance

Question 605680: Find the cost of a home in 20 years, assuming an annual inflation rate of 2%, if the present value of the house is $260,000. (Round your answer to the nearest cent.)

Answer by mathie123(224) (Show Source):
You can put this solution on YOUR website!
Okay, we will first take a look at the first few years and then get our formula (and once you know the formula for these types of questions it will be a matter of putting the numbers in the formula after).

If my house costs 260 000 and the inflation rate is 2%/year this means that next year my house will cost 260 000+260 000(0.02)=260 000 (1.02)
Similarily, for the year after, it will cost 2% more than 260 000(1.02)
This means it will cost 260 000(1.02)(1.02).
We can go on and on but you will see that you will get
where t is the number of years that have gone by .
So we can now plug in t=20 into the above formula, use our calculator and get a value (I will leave this to you, hopefully you get a value that is larger than 260 000 seeing as the price is going upwards each year).
Hopefully this helps a bit:)