Bruce and Karen have a new-born baby, Lisa. Generous grandparents have made a gift of $15 000 available for Lisa. Bruce and Karen have decided to invest this in trust for Lisa so that on her 21st birthday she will have a deposit to buy a one-bedroom home unit. Bruce and Karen are considering making additional annual payments to the trust account, in order to increase the deposit amount to 40% of the expected price of the unit. Assume that the current price of a one-bedroom home unit is $220 000 and that property prices grow at 3% p. a. Assume that the trust account receives interest at 6.5% p. a. b) How much must Bruce and Karen contribute each year to achieve the desired deposit amount of 40% of the unit's expected purchase price?

Question

Mathematics

Amir Romero

19 July, 06:20

Bruce and Karen have a new-born baby, Lisa. Generous grandparents have made a gift of $15 000 available for Lisa. Bruce and Karen have decided to invest this in trust for Lisa so that on her 21st birthday she will have a deposit to buy a one-bedroom home unit. Bruce and Karen are considering making additional annual payments to the trust account, in order to increase the deposit amount to 40% of the expected price of the unit. Assume that the current price of a one-bedroom home unit is $220 000 and that property prices grow at 3% p. a. Assume that the trust account receives interest at 6.5% p. a. b) How much must Bruce and Karen contribute each year to achieve the desired deposit amount of 40% of the unit's expected purchase price?

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Answers (2)

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Miya Pruitt · Answer 1

By using a banking calculator, the additional contribution required each year is equal to $2,536.

Joanna Walsh · Answer 2

Amount gifted (PV) $15,000

Number of time periods in years (n) 21

Interest rate pa (i) 6.50%

Future Value of gift = 15,000 * (1.065) ^21

= $56,290

Current price of unit (PV) $220,000

Expected price growth (inflation) (i) 3%

Expected future value of unit = $220,000 * (1.03) ^21 = $409,265

Desired deposit 40%

The projected deposit = $409,265*0.4 = $163,706

Yearly contribution required = $2,536.45