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3. Case Study Do the following question on a worksheet titled "Case Study". Lucius and Summer own a business called "Needful Things" and they have been renting a shop. They are considering whether they should purchase the shop or continue renting it for the following 10 years. Their business is going well, the location and the neighborhood of their store are perfect for their business, easy to commute, and they are sure that they will not consider moving in the near or distant future. So, keep renting the place does not present them flexibility that may affect their decision. They have a total of $65,000 in savings now. In addition, they estimate that they can afford $3,150 per month for space costs assume that space costs only contain rent and/or loan payments for the mortgage). Keep renting: If Lucius and Summer do not buy the shop, they will keep renting the current shop for $2,200 per month. They will deposit their savings to a savings account with an effective rate of 6.75% per year. Additionally, they will deposit the difference between the rent and what they can afford to their savings account at the end of every month. Buying the shop: The shop is currently valued at $350,000. To buy the house, the best option is using a 15-year mortgage with a 15% down payment and an effective rate of 5.25% (per year). Insurance and taxes will cost $450 per month. The initial costs (lawyer fee, etc.) will cost $7,000. In addition, they will have to pay $200 each month for utilities and maintenance combined. Lucius and Summer anticipate that they will take Needful Things online after 10 years and plan to sell the shop 10% more than what it is worth today in nominal terms). Any money not spent on the down payment, initial costs, or monthly payments (mortgage payment and monthly costs) will be deposited in a savings account with an effective rate of 6.75% per year. (a) Evaluate both plans (be as descriptive as possible). Which one is better? Why? (b) Suppose that there is also a worst-case scenario for buying the shop. It is possible that after a couple of unfortunate events, the neighborhood in which the shop is located becomes less popular and the shop will lose its value. At the end of 10 years, it will be worth 80% of what it is worth today (in nominal terms). If Lucius and Summer make their decision based on this scenario, which plan would they choose? Reconsider part a using this worts-case scenario. (c) At what price (of selling the shop) will they be indifferent between both plans? 3. Case Study Do the following question on a worksheet titled "Case Study". Lucius and Summer own a business called "Needful Things" and they have been renting a shop. They are considering whether they should purchase the shop or continue renting it for the following 10 years. Their business is going well, the location and the neighborhood of their store are perfect for their business, easy to commute, and they are sure that they will not consider moving in the near or distant future. So, keep renting the place does not present them flexibility that may affect their decision. They have a total of $65,000 in savings now. In addition, they estimate that they can afford $3,150 per month for space costs assume that space costs only contain rent and/or loan payments for the mortgage). Keep renting: If Lucius and Summer do not buy the shop, they will keep renting the current shop for $2,200 per month. They will deposit their savings to a savings account with an effective rate of 6.75% per year. Additionally, they will deposit the difference between the rent and what they can afford to their savings account at the end of every month. Buying the shop: The shop is currently valued at $350,000. To buy the house, the best option is using a 15-year mortgage with a 15% down payment and an effective rate of 5.25% (per year). Insurance and taxes will cost $450 per month. The initial costs (lawyer fee, etc.) will cost $7,000. In addition, they will have to pay $200 each month for utilities and maintenance combined. Lucius and Summer anticipate that they will take Needful Things online after 10 years and plan to sell the shop 10% more than what it is worth today in nominal terms). Any money not spent on the down payment, initial costs, or monthly payments (mortgage payment and monthly costs) will be deposited in a savings account with an effective rate of 6.75% per year. (a) Evaluate both plans (be as descriptive as possible). Which one is better? Why? (b) Suppose that there is also a worst-case scenario for buying the shop. It is possible that after a couple of unfortunate events, the neighborhood in which the shop is located becomes less popular and the shop will lose its value. At the end of 10 years, it will be worth 80% of what it is worth today (in nominal terms). If Lucius and Summer make their decision based on this scenario, which plan would they choose? Reconsider part a using this worts-case scenario. (c) At what price (of selling the shop) will they be indifferent between both plans
