Julie Brown is a single woman in her late 20s. She currently rents an apartment in the fashionable part of town for $900 a month. After considerable deliberation, she is seriously considering the purchase of an apartment for $125,000. She intends to put 20% down and expects that settlement cost will amount to another $5,000; a commercial bank has agreed to lend her money (the balance after deposit and settlement costs) at the fixed rate of 7% pa compounding monthly for 15 years. The principal reduction for the loan will be approximately $3,785.60 in the first year. Julie would have to pay an annual apartment owner's insurance premium of $600 and property taxes of $1,200 a year (she is presently paying renter's insurance of $550 per year). In addition, she estimates that annual maintenance and upkeep expenses will be about 0.5% of the price of the apartment (which includes a $30 monthly fee to the property owners' association). Julie's income puts her in the 30% tax bracket and she earns an after-tax rate of return on her investments of around 4% pa.

a. Given the information provided above, evaluate and compare Julie's alternatives of remaining in the apartment or purchasing the apartment. (You can use the cost data and do analysis for the first year).

b. Working with a friend who is a real estate agent, Julie has learned that apartments like the one she is thinking of buying are appreciating in value at the rate of 3.5% a year and are expected to continue doing so. Would such information affect the rent-or-buy decision made in part a? Explain.

c. Discuss any other factors that should be considered when making a rent-or-buy decision.

d. Which alternative would you recommend for Julie in light of your analysis?