Assume you are preparing to move into a new neighborhood. You are considering renting or buying. Divide your team into two groups.

Requirements

1. Group 1 will analyze the renting option. A suitable rental is available for $ 500 per month, and you expect rent to increase by $ 50 per month per year. Prepare a schedule showing rent payments for the next 15 years. To ­simplify the ­problem, assume rent is paid annually. Using 5% as the discount rate, ­determine the present value of the rent payments. Round present value amounts to the nearest dollar.

2. Group 2 will analyze the buying option. A suitable purchase will require ­financing $ 105,876 at 5%. Annual payments for 15 years will be $ 10,200 ( ­annual payments assumed to simplify the problem). Calculate the present value of the payments. Additionally, using Excel with appropriate formulas, prepare a payment schedule with the following columns ( year 1 is completed as an ­example):

3. After each group has prepared its schedule, meet as a full team to discuss the analyses. What is the total cash paid out for each option? What is the ­present value of the cash paid out for each option? Explain the implications of the ­previous two answers. Are there other factors that should be considered before deciding to rent orbuy?

Transcribed Image Text:

Applied Applied to Ending Principal to Interest Principal Beginning Year Prindpal Balance Payment Balance $105,876 100,970 0 $ 105,876 10,200 $ 5,294 4,906