Question

A retirement home at Wolf Ridge Estates now costs $185,000. Inflation is expected to cause this price to increase at​ 3% per year. You make an annual contribution of​ $10,000 to an investment account with the goal to accumulate enough money in 20 years to buy the retirement home at Wolf Ridge Estate. What is the annual rate of return your investment account must generate for you to achieve this​ goal?

A.

​5.10%

B.

None of the listed

C.

​6.03%

D.

​4.96%

Answer 1

Sol:

Home cost (PV) = $185,000

Annual contribution (PMT) = $10,000

Period (NPER) or (n) = 20 years

Inflation rate = 3% per year

Future value (FV) of the home = PV * (1 + Inflation rate)^n

FV = 185,000 * (1 + 3%)^20

FV = 185,000 * (1.03)^20

FV = 185,000 * 1.8061 =$334,130.58

To compute annual rate of return your investment account must generate, we can use RATE function in excel:

FV	334130.58
PMT	-10000
NPER	20
Rate	5.10%

Therefore annual rate of return your investment account must generate will be 5.10%

Answer is A. 5.10%

Working