1) What is the maximum amount that Mr. Andreotti should pay? Show the calculations and explain why.

2) What is the total amount that Mr. Andreotti will pay in total after 40 years?

3) What is the present value of the rental contract offered by the owner as option A?

4) Mr. Andreotti believes that he might be interested in selling the apartment in 40 years’ time, this is when he is planning to retire. If the interest rates remain at the existing level, what will be the price of the apartment in that moment?

Option A: renting the apartment with a perpetual contract, meaning for ever and ever. The Andreotti family thought that could be a good solution for them.

The family was very happy living in that area, and they had the chance to live there forever at an offered price of 1.600€ per month. The contract contained a clause stating that the rent price will be growing at a 0.1% monthly.

At the same time, they were not forced to ask for a loan, which represented a heavy weight in Mr. Andreotti ́s shoulders.

Option B: consisted in acquiring the property with a mortgage scheme for 40 years. The ownership was demanding an initial down payment of 1.000.000€. The total price of the apartment was still not clear, it seems there was some space for negotiation.

Mr. Andreotti new that the interest applicable rates were very attractive, around 2.4% compounded monthly, this is supposed to be the market rate for this type of activities.

Mr. Andreotti is fixing the maximum amount he can pay monthly in 2.000€.