Suppose you take a job downturn and are looking for a single family house to buy

Question

Suppose you take a job downturn and are looking for a single family house to buy. You find two houses whose characteristics are very similar. The house closer to downtown is selling for $460,000. The house further away from downtown is selling for $350,000. You plan to stay in the house for ten years. If you select the more expensive house, how much do you need to save annually in commuting costs to justify the higher price? Use an interest rate of 10% per year. Round your answer to the nearer dollar.

Explanation / Answer

Present Worth = $460,000

Letannual saving be P

so If Rent is paid at start of year

460,000 =P+ P/1.1 + P/1.1^2 + P/1.1^3 +..........P/1.1^9

460,000 = P*6.759

P = $ 68,057

If rent is Paid at end of year then

460,000 = P/1.1 + P/1.1^2 + P/1.1^3 +..........P/1.1^10

460,000 = P*6.144

P = $ 74,863

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