Please help with this case study and questions
Questions:
As Rebecca?s financial adviser, you have beenasked to prepare a briefing paperand advise her on the followings:
- The ?net? future gain or loss after two, five and ten year under the following scenarios, which Rebecca Young has determined are possible after some ?due diligence? regarding future real-estate prices in the Toronto condo market:
a. The condo price remains unchanged;
b.The condo price drops 10% over the next two years, then increases back to its purchase price by the end of five years, then increases by a total of 10% from the original purchase price by the end of ten years;
c. The condo price increases annually by the annual rate of inflation of 2% per year over the next 10 years; and
d. The condo price increases annually by an annual rate of 5% per year over the next 10 years.
In May 213, Rehecca Young completed her MBA and moved to Toronto for a new job in invests-cent banking, There, she rented a spacious, too-bedroom condominium for $3,tl per moni, which included parking but not utilities or cable television. In July 2014, the virtually identical unit nerd: door became available n sale with an asking price of $620,099, and Young helieved she could purchase it for $titl. She realized she was facing the classic buy-versus-rent decision. It was time for her to apply some of the analytical tools she had acquired in business school including \"time vaJue of money" concepts to her personal life. While Young really liked the condominium unit she was renting, as well as the condominium building itself, she felt that it wmd he inadeqtmte for her long-term needs, as she planned to move to a house or even to a larger penthouse condominium within ve to 111] years even sooner if her job continued to curl: out well. Friends and family had given Young a variety of mixed opinions concerning the bay-verswrent debate, ranging from "you're throwing your money away on rent" to \"it's better to keep things as cheap and exible as possible until you are ready to settle in for good." She realized that both sides presented good arguments, but she wanted to analyze the buy-versusprent decision from a quantitative point of view in order to provide some context for the qualitative coreiderations that would ultimately be a major part of her decision. FlHAHGlAL DETAILS If Young purchased the new condominium, she would pay monthly condo fees ofl per month, plus property taxes of $309 per month on the unit. Unlike when renting. she would also be responsible for repairs and general maintenance. which she estimted would average $61343 per year. If she decided to purchase the new unit. Young intended to provide a cash down payment ofED per cent of the purchase price. There was also a local deed-transfer tax of approximately 1.5 per cent of the purchase price, and a provincial deed-transfer tax of 1.5 per cent, hoth due on the purchase date. [For BLITEI'I'I hau'liolizadiirma onhl'liDr'Hii II|'|.|an"ii. FHMlmmFmioammat Unhuraiydmhrn Arabiajom apidftoDHDharl". Page 2 BBt4HIl24 simplicity, Young planned to initially ignore any other tax considerations throughout her analysis.) Other closing fees were estimated to be around $11,001:]. In order to nance the remaining ED per cent of the purchase price, Young contacted several lenders and found that she would be able to obtain a mortgage at a 4 per cent \"quoted" annual rate] that would be locked in for a 10-year term and that she would amortize the mortgage over 25 years, with monthly payments. The money that Young was planning to use for her down payment and closing costs was presently invested and was earning the mine effective monthly rate of return as she would be paying on her mortgage. Young asstaned that if she were to sell the condominium say, in the next two to It] years she would pay 5 per cent of the selling price to tealtor fees plus $2, in other closing fees. \fSCEHAHJD ANALYSIS In order to complete a financial analysis of the buy-verstn-rent decision, Young realized that her rst task would be to determine the required monthly mortgage payments. Next, she wanted to determine the opportunity cost [on a monthly basis} of using the lump-sum required funds for the condominium purchase rather than leaving those funds invested and earning the effective monthly rate, asstmred to be equivalent to the mortgage rate. She would then be able to determine additional monthly payments required to buy the condominimn compared to renting, including the opportunity cost. Young wanted to consider what might happen if she chose to sell the condominium at a future date. She was condent that any re-sell would not happen for at least two years, but it could certainly happen in ve or H] years\" time. She needed to model the amount of the outstanding principal at various points in the rtnre two, ve or 1t] years from now. She then wanted to determine the net future gain or loss after two, ve and It] years under the following scenarios, which she had determined were possible after some due diligence regarding future real-estate prices in the Toronto condo market: {a} The condo price remains unchanged, [h]: The condo price drops It] per cent over the next two years, then increases back to its purchase price by the end of ve years, then increases by a total of It] per cent om the original purchase price by the end of It] years; {c} The condo price increases annually by the annual rate of ination ofE per cent per year over the next ID years; and {cl} The condo price increases annually by an annual rate of 5 per cent per year over the next [0 years. FINAL GONE DERATlDHS Young realized she had a tough decision ahead of her, but she was well trained to make these types of decisions. She also recognised that her decision would not be based on quantitative factors alone, it would need to be based on any qualitative considerations as well. She knew she needed to act soon because corominituns were selling fairly quickly, and she would need to arrange nancing and contact a lawyer to assist in any paperwork if she decided to buy
