While vacationing in Knysna, John Kelley saw the vacation home of his dreams. It was listed with a sale price of R200000. The only catch is that John is 40 years old and plans to continue working until he is 65. Still he believes that prices generally increase at the overall rate of inflation. John believes that he can earn 9% annually after taxes on his investments. He is willing to invest a fixed amount at the end of each of the next 25 years to fund the cash purchase of such a house.
a) Inflation is expected to average 5% per year for the next 25 years. What will John's dream house cost when he retires?
b) How much must John invest at the end of each of the next 25 years to be able to make the cash payment at retirement?
c) What if he invests at beginning of the period instead of end of period, would there be any differences in values?