Buying vs. Renting or Leasing
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1. When does it make sense to rent your home vs buying a home? Can you describe it in terms of NPV?
2. If in some situations it makes financial sense for a consumer to lease a car, why does it make sense for a dealer to lease the car to the consumer?
3. Much like many businesses, consumers are faced with buying or leasing their cars. Thinking about the lecture, the readings, and your own experiences, how should the decision be framed?
4. The housing market has seen a recent rise in home appreciation. Many investors bought second homes. Outline the decision making process to determine if it makes sense to buy a second home and lease it. What are your basic assumptions? Do they hold for a 10 year time horizon?
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1. When does it make sense to rent your home vs buying a home? Can you describe it in terms of NPV?
Lease or Rent is a contractual arrangement by which the owner of property (the "lessor") allows another person (the "lessee") to use the property for a stated period of time in exchange for cash payments or other compensation. NPV is a discounted cash flow technique, which explicitly recognizes the time value of money. It is defined as the difference between the present value of cash inflow and cash outflows. Thus one has to compare:
1) Initial outlay on buying
2) Present value of future outflows of lease
If Present value of future outflows on lease is less than the initial outlay on buying than one can say that NPV is positive.
It makes sense to lease a home rather than buying it when the net present value of ...
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