The Potters are deliberating whether to purchase a house or continue to rent for the next 10 years. They are assured by both of their employers that no transfer to new location will occur for at least this number of years. The school their children attend is very good, and they like the neighbourhood where they live now. They have total of $40,000 available now and estimate they can afford up to $2,850 per month for the total house payment.

Rent-don't buy plan: If the Potters do not buy a house, they will continue to rent the current house for $2,300 per month. They will then place $40,000 into savings account that pays effective rate 6% per year. Additionally, they will add to this investment $550 at the end of every month, difference between what they can afford and what they indeed pay.

Buy a house plan: The Potters are considering house at a price of $330,000. Taxes and insurance are $500 per month. Up-front fees are $3,000 (survey fee, lawyer fee, etc.) Any money not spent on the down payment, upfront fees or monthly payment will be invested at a rate of 6% per year. The Potters anticipate selling the house after 10 years and plan for a 10% increase in price, that is $363,000 (after selling expenses are paid). The current 15-year fixed rate is 5% (per year), with downpayment of 10%.

1.Evaluate both plans.

2.Reconsider the problem assuming the selling price after 10 years is only 70% of the purchase price, that is $231,000.

3.For what house market price after 10 year the Potters will be indifferent be- tween two plans?