Graduate level step-by-step solution with explanation
1. A couple plans to purchase a home for $250,000. Property taxes are expected to be $1,900 per year while insurance premiums are estimated to be $700 per year. Annual repair and maintenance is estimated at $1,400. An alternative is to rent a house of about the same size for $1,500 per month (approximate using $18000 per year) payments. If an 8.0% return before-tax is the couple's minimum rate of return, what must the resale value be 10 years from today for the cost of ownership to equal the equivalent cost of renting? Including the resale value, what is the equivalent annual cost of owning the home?
Here we are given the annual cost of renting which is 18,000. First step is to find out the equivalent annual cost of owning the house. The cash outflows are the initial investment and the yearly payments for property taxes, insurance and repair and maitenance. The stream of cash outflows looks like as in the attached file row 8. These outflows ...
The solution explains how the calculate the equivalent cost of owning the house given the present price and taxes