A house is valued at 120000. If it appreciates at a rate of 3% per year what is the expected value of the house after five years(to the nearest hundred dollars)?
basic math 120000 x 0.03 = 3600
3600 x 5 =18000
If I use the formula A = P(1 +i)power n
A= 120000(1 + 0.03)power 5 = 139,112.8889 so 139,100.
Which one is good? Both answers sound OK...
You can't use the first one because then you're assuming the interest isn't cumulative.
Originally Posted by terminator
I believe the first one is known as "Fixed value interest".
The first calculation is simple interest which as janvdl said isn't correct to use here.
The second calculation is compound interest. For example, you deposit $1 in bank that pays 5% interest yearly. After year one, you have $1.05. After year two, the bank owes $1.05*(1+.05) = $1.1025. You earn interest on the previous interest earned.
Your house appreciates from the year 2 price to year 3 not from year 1 and year 3 to year 5....