Question: You are considering the purchase of a property today for $300,000. You plan to finance it with an 80 percent loan. The appreciation rate on the property value is expected to be 4 percent annually for the next three years.

a. Calculate the expected annual average rate of appreciation on home equity for the next 3 years, using both the "arithmetic" and the "geometric" average calculations. (Show and explain all necessary calculations.) What do the two mean?

b. What if you now think that a $300,000 purchase price may be somewhat high and that if you pay this price, the expected appreciation rates in your house price will be as follows: year 1=0%, year 2=2%, and year 3=3%. Recalculate both the "arithmetic" and the "geometric" averages. (Show and explain all necessary calculations.) What do the two mean?