While vacationing in Morocco, Mohammad Jassim saw the vacation home of his dreams. It was listed with a sale price of US$200,000. The only catch is that Mohammad 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. Mohammad believes that he can earn 9 percent 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 (one that can be purchased today for US$200,000) when he retires.
a. Inflation is expected to average 5 percent per year for the next 25 years. What will Mohammad's dream house cost when he retires?
b. How much must Mohammad invest at the end of each of the next 25 years to have the cash purchase price of the house when he retires?
c. If Mohammad invests at the beginning instead of at the end of each of the next 25 years, how much must he invest each year?