A beach house in Southern California now costs $350,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 20 years before Eric and Corinna retire from successful careers in commercial art. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement

Annual deposit = $7,648.27

Explanation:

Giving the following information:

A beach house in Southern California now costs $350,000.

Inflation rate = 5% per year

Interest rate = 13% annual

Number of years = 20

We need to find an annual payment to be made at the end of each year to reach the $350,000 goal.

We need to use the following formula of the future value:

FV = {A*[ (1+i) ^n-1]}/i

A = annual deposit

Isolating A:

A = (FV*i) / {[ (1+i) ^n]-1}

Real interest rate = 0.13 - 0.05 = 008

A = (350,000*0.08) / [ (1.08^20) - 1] = $7,648.27