Imagine that you are trying to evaluate the economics of purchasing a condominium to live in during college rather than renting an apartment. If you buy the condo, during each of the next 4 years you will have to pay property taxes and maintenance expenditures of about $6,000 per year, but you will avoid paying rent of $10,000 per year. When you graduate 4 years from now, you expect to sell the condo for $125,000. If you buy the condo, you will use money you have saved that is currently invested and earning a 4% annual rate of return. Assume for simplicity that all cash flows (rent, maintenance, etc.) would occur at the end of each year.
a. Draw a timeline showing the cash flows, their timing, and the required return applicable to valuing the condo.
b. What is the maximum price you would be willing to pay to acquire the condo? Explain.