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Math Help - finance question

  1. #1
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    finance question

    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
    so 138,000

    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...
    Please help
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  2. #2
    Bar0n janvdl's Avatar
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    Quote Originally Posted by terminator View Post
    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
    so 138,000

    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...
    Please help
    You can't use the first one because then you're assuming the interest isn't cumulative.

    I believe the first one is known as "Fixed value interest".
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  3. #3
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    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....
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