Suppose you currently renting an apartment at $6000 a year and have an option to buy it for $150,000. Property taxes are $1,500 per year and are deductible for income tax purposes. Annual maintenance cost on the property are $1,200 per year and are not tax deductible. You expect property taxes and maintenance cost to increase at the rate of inflation. Your income tax rate is 20% and you are earn a before-tax real interest rate of 5% per year and you plan to keep the apartment forever

a) Ifyour income on interest is taxed at the rate of 20%, what is your real after-tax interest rate?

b) What is the present value from renting the apartment forever? What is the present value from buying and owning the apartment?

c) Would you choose to rent or to own an apartment? Briefly explain.

Answer rating: 100% (QA)

a To determine the real aftertax interest rate we need to calculate the aftertax interest rate and adjust it for inflation The beforetax real interest ... View the full answer