3-2 Opportunity Cost of Renting You currently pay $10,000 per year in rent to a

Question

3-2 Opportunity Cost of Renting

You currently pay $10,000 per year in rent to a landlord for a $100,000 house, which you are

considering purchasing. You can qualify for a loan of $80,000 at 9% if you put $20,000 down

on the house. To raise money for the down payment, you would have to liquidate stock earning a

15% return. Neglect other concerns, like closing costs, capital gains, and tax consequences of

owning, and determine whether it is better to rent or own.

P3-2: This is an example of the hidden-cost fallacy.

Explanation / Answer

ANSWER

value of rent paid at the end of 10 year is 10000 * [1.1 ^10 -1]/0.1 =159374
value of the house at the end of 10 years is 100000 * 1.15^10 = 404555
value of stocks 20000*1.15^10 =80911

then you are + house - 483018

2. do

EMI for 10 years with 9% would be 12.5% p.a. ie. 10000 p.a. and value will be 159374
value of stocks you sold will be 80911

Then you are + house -240285


this shows buying a house now is 242733 $ beneficaial after 10 yeras [ effectrively, you lose $ 93584 right now by not purchasing]

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