Case Study 1: Buy or Rent: Living in Singapore (Concept application: Time value of money)

Case Synopsis:

Mr. and Mrs. Wong and their three young children had rented a condominium unit in Singapore for SG$4000 per month for the past six years. They had been watching the property market with the objective of buying a home of their own. A large unit in the same building finally become available for sale in June 2016. Coincidently, their rental lease would expire soon after that date. If they decided to buy the larger unit, they would hold it for the next 10 years. Their net gain or loss of the buy versus rent decision would depend on the selling price of the unit at the end of 10 years and rental payments.

1.What is the required monthly mortgage payment?

2.What are the initial cash outflows of the buy decision?

3.What is the present value of the initial cash outflows of the buy decision from month 0 to month 120?

4.Compare the relevant monthly cash outflows of the buy decision and rent decision from month 0 to month 3, assuming rent stays constant. What are the additional payments required to buy versus rent?

5.What is the principal outstanding on the mortgage at the end of 10 years?