Group Project 3 (Capital Investment)

Assume you are preparing to move into a new neighborhood. You are considering renting or buying. Here are the information for the renting and buying option.

Renting Option

You are expected to pay $500 per month for the first year, and rent will increase by $50 per month per year for the next 15 years (e.g., $550 per month for the 2^nd year, $600 per month for the 3^rd year, etc.). Prepare a schedule showing rent payments for the next 15 years. To simplify the problem, assume rent is paid annually at the end of each year. Discount rate is 5%.

Buying Option

Annual payments for the next 15 years will be $10,200 (at the end of each year). Calculate the present value of the buying option, using 5% as the discount rate.

1)Determine the present value of the renting option (rounded to the nearest dollar).

2)Determine the present value of the buying option (rounded to the nearest dollar).

3)Based your calculation, which option is preferred? Any other considerations you think should be considered in the real world?