Question

Jim and his wife Pam are thinking about buying a house in Philadelphia in three years. They will have $190,000 from the sale of their house in Scranton. They are planning on putting the money from the sale into an account that pays 5.0% APR compounded monthly. They will also contribute $3,000 to the account per year. They will live in an apartment for the three years between the move. How expensive can their house in Philadelphia be if they pay for it with the money in the account?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B с 1 2 APR, compounded monthly Effective annual rate 5.00% 5.12% 3 4 5 6 7 Sale amount deposited Annual contribution to account Years $190,000.00 $3,000.00 3 oc Account balance at Year-3 ( New house price) $230,148.03 9 10 11

Cell reference -

А B C 1 2 3 APR, compounded monthly Effective annual rate 0.05 = (1+C2/12)^12-1 4. 5 6. Sale amount deposited Annual contribution to account Years 190000 3000 3 7 8 Account balance at Year-3 ( New house price) =FV(C3,C7,-C6,-C5,0) 9 10 11 12

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.