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 peryear, 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 the condo, you will use money you have saved that is currently invested and earning a 4% annual after-tax rate of return. Assume for simplicity that all cash flows (rent, maintenance, etc.) would occur at the end of each year.

1. Draw a timeline showing the cashflows, their timing, and the required return applicable to valuing the condo.

(6 marks)

Year		$
1-4	Investment (Cash outflow): Property taxes and maintenance expenditures ($6000 x 4 years)	(24,000)
1-4	Saving (Cash inflow) Rental ($10,000 x4 years)	40,000
	Net Cashflow	16,000
4	Proceed from Sale of Condo	125,000

Required rate of return is 4%

2. What is the maximum price you would be willing to pay to acquire the condo? Explain.

(4 marks)

Year	Cashflow	$	Discount (4%)
0	Purchase	(?)	1.000	(?)
1-4	Net Cash flow	16000	Use present Value annuity (4%, 4 years)
4	Proceed from Sale of Condo	125,000	Use Present Value (4%, 4, 4 years)
				NPV at least 0

[TOTAL:10 MARKS]