Following a weekend drive to Noose Sunshine Coast to test out his new BMW X6 car, Mr
Question:
Following a weekend drive to Noose Sunshine Coast to test out his new BMW X6 car, Mr Jack Bourne identified his 'dream' retirement home at the end of 2010. The property is currently (end 2010) valued at 5850,000 and is likely to appreciate in value over the next 15 years (his anticipated retirement date from now) as follows:
-Years 1 to 5 by 8% pa.,
-Years 6 to 10 by 10% p.a., and
-Years 11 to 15 by 15% pa.
Jack is told by his financial advisor that he can earn a net 14% p.a. rate of return on any investment funds he puts aside to pay for his 'dream' retirement home over the 15 year term. Moreover, as a result of an inheritance from his grandpa, Jack also anticipates that he will be able to add a lump sum of $300,000 to these investment fiords (used to pay for his retirement home) in 3 years from now.
a) Given the information provided above, approximately what amount must Jack invest on an annual basis in order to be able to buy his dream home at retirement?
i) At the end of each of the next 15 years?
ii) At the beginning of each of the next 15 years?
iii) Utilizing your time value of money skills, briefly explain why the amounts calculated in i) and ii) are the same or different.
Financial Accounting
ISBN: 978-0078025549
3rd edition
Authors: J. David Spiceland, Wayne Thomas, Don Herrmann