Nicole is considering buying herself a house vs. renting. She will be moving to a new town in 2 years. An apartment costs $1000 per month including utilities. She can buy a house for $150, 000 and will have to pay $350 per month for taxes and $150 per month for utilities. Nicole thinks the value of the house may go up by as much as 20% at the end of two years. At worst, she believes the house will go up 0%. She feels that that all values between 0% and 20% are equally likely.

1. If Nicole buys the house and the value goes up 2% a year, what is its value at the end of 2 years?
2. If Nicole buys the house, how much money would she save each year compared to renting?
3. If Nicole buys the house, and then sells it after 5 years, what is the expected value of buying the house instead of renting? (HINT: assume a MARR of 0, and consider both how much money you save by not paying rent for 5 years and the expected increase in the value of the house.)
4. Nicole is also fortunate enough to have $150, 000 in a trust fund. If she doesn't buy the house, she can leave it in her trust fund where it accumulates interest at 8% per year. If Nicole leaves her money in her trust fund, what is its value at the end of 3 years?

Answer rating: 100% (QA)

If the value of the house goes up 2 per year for two years its value at the end of two years would b... View the full answer