eBook hapter 5 ritical Thinking Case 3 ophia\'s Rent-or-Buy Decision Sophla Harr
ID: 2815779 • Letter: E
Question
eBook hapter 5 ritical Thinking Case 3 ophia's Rent-or-Buy Decision Sophla Harris is a single woman in her late 20s. She is renting an apartment in the fashionable part of town for $1,100 a month. After much thought, she's seriously considering buying a condominium for $175,000. She intends to put 20 percent down and expects that closing cost wn amount to anothe SS Oi·commer al bank has iereed to led her money at the fixed rate of 6 percent on a 15-year mortgage. Sophia would have to pay an annual condominium owner's insurance premium of $560 and property taxes of $1,100 year (she's now paying renter's insurance of $550 per year). In addition, she estimates that annual maintenance expenses ill be about 0.5 percent of the price of the condo (which includes a $30 monthly fee to the property owners' association). Sophia's income puts her in the 25 percent tax bracket (she itemizes her deductions on her tax retums), and she earns an after-tax rate of return on her investments of around 4 percent 1. Given the information provided, use Worksheet 5.2 to evaluate and compare Sophia's alternatives of remaining in the apartment or purchasiog the condo. Round the answers to the nearest dollar. (Note: Assume Sophia's security deposit is equal to one month's rent.) Round your answers to the nearest cent. Annual ownership cost Annual rental cost 2. Working with a friend who is a realtor, Sophia has learned that condos lke the one she's thinking of buying are appreciating in value at the rate of 3.5 percent a year and are expected to continue doing so. Would such information affect the rent-or-buy decision made in Question 17Explanation / Answer
Soln : Step 1: Lets calculate the yearly EMI of loan, as not given if it is monthly or yearly.
Loan amount = 175000*80% = 140000...............(Since 20% is down payment)
Using Excel PMT formula = PMT(6%,15,-140000,0) = 14415 = EMI on yearly basis.
Annual ownership cost 14415 +1100 + 560 +0.5% of 175000 = $24825
Annual rent cost = 1100*12 + 550*!2 = 13750
We can clearly see that renting apartment is better option
2. now in case if condo price increase at 3.5% a year , then amount received after selling property = 175000/3.5% = 5000000
Net profit = 5000000-175000 = 325000
while in case if renting the amount saved in a year = 24825 - 13750 = $11075
Now, in case if it is invested at 4% rate , amount will be = 11075/0.04 = 276869
We can again see that 325000 >27869 , hence buying condo seems to be good option, considering that Sophia rent will remian this much for next years.
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