Question

Use this information for the following 2 questions: The BU chapter of Habitat for Humanity wants to raise money to help families on the North Carolina coast to build homes in communities farther away from flood zones. They plan to fund the construction of one home per year during Spring Break forever and have made the following assumptions: • • • They plan to fund the first home in four years They plan to invest $10 million today They want the funding to increase by 3% per year after the first house is built in order to cover increases in material costs. Assume an interest rate of 5% • 20. Based on the above assumptions, how much will the funding be for the first home in four years? A) $200,000 B) $218,545 C) $231,525 D) $243,101

please use financial calculator

Answer 1

Using financial calculator
PV=-10000000
PMT=0
I/Y=5%
N=3
CPT FV=11576250

Value of house=11576250*(5%-3%)=231525

Using formula:
Let the value of house in 4th year be X
Then Present value of the house in 3rd year=X/(r-g)
Present value of house now=X/(r-g)*1/(1+r)^3

Present Value of investment=Present value of house now

Hence,
10=X/(1+5%)^3*1/(5%-3%)
=>X=10*(5%-3%)*(1+5%)^3*10^6=231525