A couple in Regina, Saskatchewan, must decide whether it is more economical to buy a home or to continue to rent. The couple rents a one-bedroom duplex for $460 a month plus $120 per month for basic utilities. Rent is expected to rise 2.5% each year, and utilities are expected to rise 5% each year. Rent and utilities costs only rise at the end of each year. So in year 1, for example, the rent will be $460 each and every month. But the rent will be higher in year 2, and so on. The couple is considering buying a home that costs $94,000. A local mortgage company will provide a loan that requires a down payment of 5%. If they buy the house, the realtor will also charge a sales commission of 5% of the value of the purchase, payable immediately. The couple would select a 25-year fixed-rate mortgage with an 7% interest rate. It is estimated that the basic utilities, home insurance, and maintenance costs will be $300 each month, and will rise 4% every year (but will only rise once per year, at the end of the year). The home is expected to appreciate in value 3.5% a year. If they buy a home, assume they will sell it in 15 years. (a) Choose a discount rate to apply for net present worth analysis. Justify your decision to choose this discount rate. 6) Analyze both options using net present worth analysis (rounded to the nearest dollar). Which alternative should the couple select? The problem is missing a piece of information that you would need to properly assess the options. What is it, and why is it necessary? A couple in Regina, Saskatchewan, must decide whether it is more economical to buy a home or to continue to rent. The couple rents a one-bedroom duplex for $460 a month plus $120 per month for basic utilities. Rent is expected to rise 2.5% each year, and utilities are expected to rise 5% each year. Rent and utilities costs only rise at the end of each year. So in year 1, for example, the rent will be $460 each and every month. But the rent will be higher in year 2, and so on. The couple is considering buying a home that costs $94,000. A local mortgage company will provide a loan that requires a down payment of 5%. If they buy the house, the realtor will also charge a sales commission of 5% of the value of the purchase, payable immediately. The couple would select a 25-year fixed-rate mortgage with an 7% interest rate. It is estimated that the basic utilities, home insurance, and maintenance costs will be $300 each month, and will rise 4% every year (but will only rise once per year, at the end of the year). The home is expected to appreciate in value 3.5% a year. If they buy a home, assume they will sell it in 15 years. (a) Choose a discount rate to apply for net present worth analysis. Justify your decision to choose this discount rate. 6) Analyze both options using net present worth analysis (rounded to the nearest dollar). Which alternative should the couple select? The problem is missing a piece of information that you would need to properly assess the options. What is it, and why is it necessary
