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You are facing the decision of whether to buy a home or to rent based on your future wealth at the end of 25 years.
You are facing the decision of whether to buy a home or to rent based on your future wealth at the end of 25 years. Below is the information required to make the decision. The purchase price of the home is $400,000 to be paid by a down payment of $40,000 and monthly mortgage payments for 25 years at a monthly rate equivalent to 5% effective annual. The market value of the home is expected to increase monthly by a rate equivalent to 3% effective annual forever. The additional ownership costs on the home (taxes, repairs, maintenance, etc) total 0.1% at the end of each month based on the value of the home at the beginning of each month. The alternative to owning a home is to rent for $2.000 a month. Rental costs are expected to increase by 1% at the end of each year forever. . In addition to paying rent you invest the money you prepared for the down payment at time zero, and the difference between your monthly rental cost and what you would be paying each month to own the home into the stock market (monthly investment=mortgage + ownership costs - rent). These investments are expected to earn 0.8% monthly return. Assume all payments are end of month. The home purchase is at time zer 25 years is the investment horizon, meaning the time at which all payments stop and a decision is made. Question 1: Show the future value of the investments in the stock market in Cell B11. Show the future value of the home in Cil. Show the difference (B11-C11) in D11. Write your decision in Ell and explanation in F11. Question 2: Repeat Question 1 if the mortgage rate drops from 5% to 4%, other parameters remain unchanged. Write your answers in row 12. Question 3: Repeat Question 1 if the home growth rate increases from 3% to 4%, other parameters remain unchanged. Write your answers in row 13. Question 4: Repeat Question 1 if the monthly investment return drops from 0.8% to 0.7%, other parameters remain unchanged. Write your answers in row 14. Question 5: Repeat Question 1 if the annual increment on rental increases from 1% to 2%, other parameters remain unchanged. Write your answers in row 15
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