Facts:
Property: Tierra Catalina, near la Encantada, 2 Bed/2 Bath
Rent Value: $1300 / month
Sale value: 180,000
Savings: $25,000
Broker promised interest rate: 7%
Bank loan: Amt: 155,000, 15 Year period, at 5%
Maintenance: $1,000/yr regular + $5,000/yr extraordinary (10% probability)
Sale Broker Commission: 3%
Leave and close shop after 5 years
Sell value of 200,000, five years from now.
Real Estate Tax: 1.25% of Sale Value
Annuity formula: NPV = (A / r ) * { 1 – (1+r)^(-n) }
Individual Assignments
- Calculate the NPV from
buying a home, the NPV from renting a home, and compare. Which is better? Why?
- Calculate the internal
rate of return that would make you indifferent between these two options. Show
your thought process in addition to your answer.
Go online and find your realistic dream car (e.g. not a Porsche). Use KBB to make realistic assumptions on the resale value of the car three years from now. Assume a 7% discount rate, assume you will sell the car in three years. Using an NPV analysis, compare the three most typical purchase options:
(a) purchasing the vehicle with cash, including the cash bonus offers
(b) purchasing the vehicle using the company’s 60 month financing offer (c) using the company’s lease option
Sample Solution