Ch 05: Assignment - Making Automobile and Housing Decisions
To perform a rent-or-buy analysis, David and his wife have collected the following information:
. If they rent, the builder will require monthly rental payments of $1,100 and a security deposit equal to two months of rent.
. Since they want to be protected against the possible loss of their possessions, they will purchase a renters' policy of $200 every six
months, while a more comprehensive homeowners' policy will cost 0.5% of the home's value per year.
• Money used to fund the house's security deposit could otherwise be invested to earn 2% per year after taxes. Funds expended for a
home's down payment and closing costs also incur an opportunity cost.
If the house is purchased, it will cost $247,000 and will require a 20% down payment. The loan will carry an interest rate of 6%, a
term of 30 years, and monthly payments of $1,185. The closing costs associated with the house's mortgage will be $3,500.
• The property taxes and the maintenance and repair expenses on the house are estimated to be 2% and 2% of the house's total price,
respectively.
• Your ordinary income is taxed at the rate of 28%, and you'll be willing to itemize your tax deductions in the event that you purchase
your new home.
• Financial publications report that home values are expected to increase by 3% this year due to inflation.
Complete a rent-or-buy analysis worksheet to determine the total cost of renting and the total cost of purchasing David and his wife's prospective
house and then recommend their best strategy. To complete the worksheet, enter the appropriate values in their corresponding blanks and round each
value to the nearest whole dollar.
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