Question
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
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 thecondo, 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 after taxes. If you buy thecondo, you will use money you have saved that is currently invested and earning a 4% annualafter-tax rate of return. Assume for simplicity that all cash flows (rent, maintenance, etc.) would occur at the end of each year.
- Draw a timeline showing the cashflows, theirtiming, and the required return applicable to valuing the condo.
- What is the maximum price you would be willing to pay to acquire thecondo? Explain.
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