Math Finance Question?

Question

Hi all,

I need help in the following question:

Suppose I have a choice of selling my apartment now at $250 000 or selling it 12 years later at $ 320 000. Taking that inflation is at a flat rise of 3% annually and current bank interes rate is about 2%.

Which choice is more worthwhile? Please advise with calculations. Deeply appreciate the help :D

Thank you

Answer 1

Sell now and invest the money, it will make you more than $70,000 profit and also with the credit crunch and falling house prices you might not even get $250,000 in 12 years time let alone $320,000.

Answer 2

don't sell your apartment because property rates going up.

Answer 3

you need to get the future value of your $250,000 given that interest rates are at 2% but inflation is at 3%

Since inflation is actually higher than interest rate, your money is shrinking at 1% a year.

the formula for getting the future value of a present sum is:

FV = PV x (1 + i)^n

where i = interest rate

n = number of years covered

so FV = $250,000 x (1 + (.02 - .03))^12

FV = $250,000 x (.99)^12

FV = $250,000 x .88638

FV = $221,596.22

Given only those variables, since $320,000 is higher than $221,596.22, you're better off selling in 12 years if all you plan on doing with your money is putting it in a bank with a 2% annual interest.

However, if there are other information like options on where you can reinvest your money, or if you are going to use it for a business venture which will earn you higher returns, you will be better off selling it now.

However, you need to consider the earnings on your initial investment over 12 years.  Based on the compounded interest calculator (cause I can't recall the formula for it) on http://www.moneychimp.com/calculator/com... for you to match the $320,000 in 12 years, you actually need around 2.85% net compounding interest on your initial $250,000.  With an annual inflation of 3%, you need to find an investment that is at 5.85% to break even in 12 years at $350,000.  

Other factors that were not considered in the information you gave are property markets at the time you intend to sell it, the annual property taxes, as well as the cost of maintaining the house.

Answer 4

Sell now and invest the money in a high interest account for 12 years. That will make you more than $320,000.