Question

A new building cost $2,234,500 to build seven years ago. The cost service calculation shows that...

  1. A new building cost $2,234,500 to build seven years ago. The cost service calculation shows that it would cost $2,987,500 to construct this building today. What is the straight-line annual rate of increase shown by this calculation? Please Show Work (NO EXCEL)
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Answer #1

Here we will use the following formula:

FV = PV * (1 + r%)n

where, FV = Future value = $2987500, PV = Present value = $2234500, r = rate of interest or increase, n= time period = 7

now, putting theses values in the above equation, we get,

$2987500 = $2234500 * (1 + r)7

$2987500 / $2234500 = (1 + r)7

1.336988140523 = (1 + r)7

(1.336988140523)1/7 = 1 + r

1.04236 = 1 + r

r = 1.0423611 - 1

r = 0.0423611 or 4.236%

So, straight line annual rate of increase is 4.236%

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