Olivia is 18 and would like to buy a house when she is 30. What is the discount factor for today’s prices if the housing values increase 8% per year?

Question

hero · Answer

More information is most likely required in order to help you.

anonymous · Answer

Thats what i thought but thats all the question says :/

hero · Answer

You should go back and re-read the chapter of the book and find out the relationship between "discount factor" and "housing value increases".

anonymous · Answer

Why isn't it just:

$$1/(1+r)^{t}$$
or
$$1/(1+.08)^{30-18}$$
$$=1/(1.08)^{12}$$
= .39711

anonymous · Answer

WHAT FORMULA IS THAT? thats right.

anonymous · Answer

It's been awhile since I did this. But I just know it as the formula for a discount value using simple interest.

r = interest rate
t = time (in this case 12 years until she buys a house)

anonymous · Answer

should have wrote above...formula for a discount factor using simple interest

anonymous · Answer

http://en.wikipedia.org/wiki/Discounting

anonymous · Answer

that formula assumes annual compounding of interest...

Not sure what you are up to, but if you assumed continuous compounding of interest, the formula would be:
$$e^{-rt}$$