Answered step by step
Verified Expert Solution
Question
1 Approved Answer
please show all steps please help You are making a buying-vs-renting decision. You have the following information: The house you like costs $200,000. You expect
please show all steps please help You are making a buying-vs-renting decision. You have the following information: The house you like costs $200,000. You expect home values to increase by 10% every year. Property taxes: 2% of house value, due at the end of each year. In other words, the property taxes due at the end of year 1 are based on the house value in year o.) Maintenance: $1,000 per year. You would take a home mortgage loan with an LTV of 80% Loan information: 30-year term, fully amortizing with fixed annual payments, 5 annual interest rate, remaining balance due upon house sale. When you sell the house the estimated selling expenses are $5,000, and you expect no capital gain taxes. if you instead rent a house just like this one, you'd be paying $15.000 on rent every year. Your income puts you in a 25 income tax bracket. 1 Calculate the after-tax cash flows if you buy rather than rent. Use them to calculate the after-tax internal Rate of Return (ATIRR). The attached Excel spreadsheet might help you to put all information and required calculations in an organized way! HINT: If you are doing all math right, the value in cell E14 should be 13,099.94.) 7 5 6 8 9 0 w E R T Y U P 1 44 A S D F G . J Rock i N X A C V B M 1 trol option Command command option (a) If you can earn a 45% annual return on other investments, investing your money into this house and selling it after 2 years is a (use "1" for "good" or "2" for "bad") idea financially. That's because the calculated IRR is (use "1" for greater than" or "2" for "lower than") the 20% required annual return. The calculated after-tax IRR equals % (round to 2 decimal places; use "0" for any blank values) (b) if you can earn a 45% annual return on other investments, investing your money into this house and selling it after 3 years is a (use "1" for "good" or "2" for "bad") idea financially. That's because the calculated IRRIS (use "1" for "greater than" or "2" for "lower than") the 45% required annual return. The calculated after-tax IRR equals v % (round to 2 decimal place, use" for any blank values) (c) Using 45% as your required return, in order for you to be indifferent between buying and not buying for 3 years, the LTV needs to approximately equal (HINT: Use goal seek" in Excel URL 5 4 T 2 3 5 6 B 9 0 Q w Y E R T P S D F G . J K L AC > Z C Z C
please show all steps
please help
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started