Answer:
Justin
Present value of $714,677.31 at 3% per year for 5 years:
Discount factor of 3% for 5 years (discount factor table) = 0.863
Present value = $714,677.31 x 0.863
= $616,766.52
The house has a current value of $616,766.52.
Explanation:
a) Data and Calculations:
Investment = $10,000 per month
Period = 5 years or 60 months
Annual effective interest = 6% or 0.5% monthly
b) Future value of investment, using an online financial calculator:
FV (Future Value) $714,677.31
PV (Present Value) $529,841.89
N (Number of Periods) 60.000
I/Y (Interest Rate) 0.500%
PMT (Periodic Payment) $10,000.00
Starting Investment $10,000.00
Total Principal $610,000.00
Total Interest $104,677.31
c) First, we work out the future value of Justin's investment of $10,000 per month for five years at 6% annual effective. This gives us a future value of $714,677.31. Then, we can discount this future value to its present value with a discount factor of 0.863 if the inflation rate is 3% becauses houses appreciate at the inflation rate. Multiplying this future value by the discount factor gives the present value of the house as $616,766.52. This means that the house had appreciated in value by $97,910.79 at the inflation rate of 3% per year after five years.
