Samuel just moved to Radford and plans to live here for 5 years. He just found...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Samuel just moved to Radford and plans to live here for 5 years. He just found a "perfect" house to live in with his family. The current owner is willing to sell or rent the house to Samuel. The selling price will be $265000. Samuel has 20% of the house's price for down payment and also 2% of the house's price for mortgage closing cost if he buys the house. Samuel is eligible for a 30-year 5% fixed-rate mortgage loan to finish the purchase. If Samuel owns the house, he needs to pay $4000 annually for insurance and property tax, and expects the house price to increase by 6% over the 5 years. When he sells the house, he needs to pay 6% of the selling price to the realtors. If Samuel rents the house, the annual rent will be $28000. Samuel is confident that he can have an annual after-tax investment return of 6% over the next five years. Samuel does not itemize tax deductions. Assume that all the expenses, payments, and investment payoffs occur at the end of the year. For living in the house for 5 years, what is the difference in the present value of costs between buying and renting (please report the absolute value of the difference and keep zero decimal places)? Hints 1. In Excel, you may need functions: PMT(rate,nper, pv, fv) and NPV(rate, CF1:CFn) 2. Renting can save the down payment which can be used for investment. However, renting is also costly and Samuel will not get any equity value of the house at the end of year 5. Buying costs more now and entails subsequent mortgage payments and other costs of ownership, but Samuel can get some equity value at the end of year 5 (which can be inferred from the loan amortization schedule). 3. Because Samuel does not itemize tax deductions, we do not need to consider tax savings from the interest portion of mortgage payments. Your Answer: Answer Samuel just moved to Radford and plans to live here for 5 years. He just found a "perfect" house to live in with his family. The current owner is willing to sell or rent the house to Samuel. The selling price will be $265000. Samuel has 20% of the house's price for down payment and also 2% of the house's price for mortgage closing cost if he buys the house. Samuel is eligible for a 30-year 5% fixed-rate mortgage loan to finish the purchase. If Samuel owns the house, he needs to pay $4000 annually for insurance and property tax, and expects the house price to increase by 6% over the 5 years. When he sells the house, he needs to pay 6% of the selling price to the realtors. If Samuel rents the house, the annual rent will be $28000. Samuel is confident that he can have an annual after-tax investment return of 6% over the next five years. Samuel does not itemize tax deductions. Assume that all the expenses, payments, and investment payoffs occur at the end of the year. For living in the house for 5 years, what is the difference in the present value of costs between buying and renting (please report the absolute value of the difference and keep zero decimal places)? Hints 1. In Excel, you may need functions: PMT(rate,nper, pv, fv) and NPV(rate, CF1:CFn) 2. Renting can save the down payment which can be used for investment. However, renting is also costly and Samuel will not get any equity value of the house at the end of year 5. Buying costs more now and entails subsequent mortgage payments and other costs of ownership, but Samuel can get some equity value at the end of year 5 (which can be inferred from the loan amortization schedule). 3. Because Samuel does not itemize tax deductions, we do not need to consider tax savings from the interest portion of mortgage payments. Your Answer: Answer
Expert Answer:
Answer rating: 100% (QA)
Buying the House Selling Price 265000 Down Payment 20 of Selling Price 20 of 265000 02 265000 53000 ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
A company has 10,000 employees. Each employee is entitled to twenty days of paid holiday per calendar year. Up to five days of this entitlement may be carried forward and taken in the following year...
-
Most wage and salary administrators contend that project management organizational structures must be married to the personnel evaluation process because personnel are always concerned with how they...
-
Organizational independence exists if the CAE reports to some other organizational level than the CEO or similar head of the organization as long as the internal audit activity without interference:...
-
James Lewis, a resident of Kentucky, sustained an injury while operating a Caterpillar bulldozer. He filed suit against Caterpillar, a company incorporated in Delaware but with its principal place of...
-
Optimus Company manufactures a variety of tools and industrial equipment. The company operates through three divisions. Each division is an investment center. Operating data for the Home Division for...
-
A 1 kg metal block is heated to 200 C and then dropped into a thermally isolated container with 4 kg of water and 100 gr of ice both at a temperature of 0 C. If the specific heat of water is cw=4186...
-
Tablet Company is looking to set up a wholly owned subsidiary firm, which will sell cheap, rugged computers in developing countries. The debt schedule for the firm is predetermined and shown below...
-
2. Create a form as shown below: Haze Indicator Application This application will assess the haze severity for Perak, Malaysia. Please enter the API Safety Level District Gerik Kuala Kangsar Ipoh...
-
Given the information in Table A, complete the required forecast items. Table A: Pro Forma Income Statement Unit: THB Million 2020 2021 Sales Cost of Goods Sold Gross Profit Selling and G&A Expenses...
-
Grayson is a 24% tax rate bracket and has sold the following stocks in 2018 Description Date purchased Basis Date Sold Amount Realized Stock A 1/23/1994 $7,500 7/22/2018 $4,700 Stock B 4/10/2018...
-
From the graph below, when do you think that portfolio risk was probably the highest? Answer [ ] Percentage of stocks in the S&P 500 moving together 80% 60 40 20 - Feb 2020 (21 22 Note: Data notes...
-
analyze the Return on equity, Return on assets and Net profit margin of Coles and Woolworth from 2021 to 2022 based on the data in the chart. Ratio Ratio Equation Coles Coles Woolwort Woolwort...
-
$ For each of the following, compute the future value (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g.,...
-
1. How many probability values are required to specify this Bayes Network? 2. What is true regarding backpropagation rule? (Choose all that apply) 3. What is the objective of backpropagation...
-
(a) Prove that form an orthonormal basis for R3 for the usual dot product. (b) Find the coordinates of v = (1, 1, 1)T relative to this basis. (c) Verify formula (5.5) in this particular case. 48-65...
-
1. Which two good uses of credit seem most reasonable to you? Which do not? 2. Explain the two downsides of credit that would be most worrisome for you. 3. Distinguish between the APR and the finance...
-
1. What is the best way to establish documentation for potential losses to your personal property? 2. Describe what you should do to file a claim most effectively when involved in an automobile...
-
(a) To help her make a decision, Taliesha has asked you to list two positive points and two negative points about each plan. Prepare such a list. (b) Why might Talieshas employer provide an incentive...
-
We have data on the distance covered by irrigation water in a furrow of a field. The data are to be used to relate the distance covered to the time since watering began. The data are given in Table...
-
Data were collected to discern environmental factors affecting health standards. For 21 small regions we have data on the following variables: The data are given in Table 8.27. (a) Perform a...
-
Twenty-five volunteer athletes participated in a study of cross-disciplinary athletic abilities. The group was comprised of athletes from football, baseball, water polo, volleyball, and soccer. None...
Study smarter with the SolutionInn App