Valuation fundamentalsPersonal Finance ProblemImagine that you are trying to evaluate the economics of purchasing a condominium to live in during college rather than renting an appartment. If you buy the condo, during each of the next

4

years you will have to pay property taxes and maintenance expeditures of about

$7,000

per year, but you will avoid paying rent of

$10,000

per year. When you graduate

4

years from now, you expect to sell the condo for

$125,000.

If you buy the condo, you will use money you have saved and invested earning a

5%

annual return. Assume that all cash flows (rent, maintenance, etc.) would occur at the end of each year.

a.Draw a timeline showing the cash flows, their timing, and the required return applicable to valuing the condo.

b.What is the maximum price you pay for the condo? Explain.