9B14N024 TIME VALUE OF MONEY: THE BUY VERSUS RENT DECISION Sean Cleary and Stephen Foerster wrote this case solely to provide material for class...

plz suggest answer for the attached case.

I need to compare the outcome of buy versus rent.

9B14N024 TIME VALUE OF MONEY: THE BUY VERSUS RENT DECISION Sean Cleary and Stephen Foerster wrote this case solely to provide material for class discussion. The authors do not intend toillustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and otheridentifying information to protect confidentiality.This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without thepermission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rightsorganization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, WesternUniversity, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) ; www.iveycases.com.Copyright © 2014, Richard Ivey School of Business Foundation Version: 2015-06-05 In May 2013, Rebecca Young completed her MBA and moved to Toronto for a new job in investmentbanking. There, she rented a spacious, two-bedroom condominium for $3,000 per month, which includedparking but not utilities or cable television. In July 2014, the virtually identical unit next door becameavailable for sale with an asking price of $620,000, and Young believed she could purchase it for$600,000. She realized she was facing the classic buy-versus-rent decision. It was time for her to applysome of the analytical tools she had acquired in business school — including “time value of money”concepts — to her personal life.While Young really liked the condominium unit she was renting, as well as the condominium buildingitself, she felt that it would be inadequate for her long-term needs, as she planned to move to a house oreven to a larger penthouse condominium within five to 10 years — even sooner if her job continued towork out well.Friends and family had given Young a variety of mixed opinions concerning the buy-versus-rent debate,ranging from “you’re throwing your money away on rent” to “it’s better to keep things as cheap andflexible as possible until you are ready to settle in for good.” She realized that both sides presented goodarguments, but she wanted to analyze the buy-versus-rent decision from a quantitative point of view inorder to provide some context for the qualitative considerations that would ultimately be a major part ofher decision. FINANCIAL DETAILS If Young purchased the new condominium, she would pay monthly condo fees of $1,055 per month, plusproperty taxes of $300 per month on the unit. Unlike when renting, she would also be responsible forrepairs and general maintenance, which she estimated would average $600 per year.If she decided to purchase the new unit, Young intended to provide a cash down payment of 20 per centof the purchase price. There was also a local deed-transfer tax of approximately 1.5 per cent of thepurchase price, and a provincial deed-transfer tax of 1.5 per cent, both due on the purchase date. (For Page 2 9B14N024 simplicity, Young planned to initially ignore any other tax considerations throughout her analysis.) Otherclosing fees were estimated to be around $2,000.In order to finance the remaining 80 per cent of the purchase price, Young contacted several lenders andfound that she would be able to obtain a mortgage at a 4 per cent “quoted” annual rate1 that would belocked in for a 10-year term and that she would amortize the mortgage over 25 years, with monthlypayments. The money that Young was planning to use for her down payment and closing costs waspresently invested and was earning the same effective monthly rate of return as she would be paying onher mortgage. Young assumed that if she were to sell the condominium — say, in the next two to 10 years— she would pay 5 per cent of the selling price to realtor fees plus $2,000 in other closing fees.SCENARIO ANALYSIS In order to complete a financial analysis of the buy-versus-rent decision, Young realized that her first taskwould be to determine the required monthly mortgage payments. Next, she wanted to determine theopportunity cost (on a monthly basis) of using the lump-sum required funds for the condominiumpurchase rather than leaving those funds invested and earning the effective monthly rate, assumed to beequivalent to the mortgage rate. She would then be able to determine additional monthly paymentsrequired to buy the condominium compared to renting, including the opportunity cost.Young wanted to consider what might happen if she chose to sell the condominium at a future date. Shewas confident that any re-sell would not happen for at least two years, but it could certainly happen in fiveor 10 years’ time. She needed to model the amount of the outstanding principal at various points in thefuture — two, five or 10 years from now. She then wanted to determine the net future gain or loss aftertwo, five and 10 years under the following scenarios, which she had determined were possible after somedue diligence regarding future real-estate prices in the Toronto condo market: (a) The condo priceremains unchanged; (b) The condo price drops 10 per cent over the next two years, then increases back toits purchase price by the end of five years, then increases by a total of 10 per cent from the originalpurchase price by the end of 10 years; (c) The condo price increases annually by the annual rate ofinflation of 2 per cent per year over the next 10 years; and (d) The condo price increases annually by anannual rate of 5 per cent per year over the next 10 years.FINAL CONSIDERATIONS Young realized she had a tough decision ahead of her, but she was well trained to make these types ofdecisions. She also recognized that her decision would not be based on quantitative factors alone; it wouldneed to be based on any qualitative considerations as well. She knew she needed to act soon becausecondominiums were selling fairly quickly, and she would need to arrange financing and contact a lawyer toassist in any paperwork if she decided to buy. 1 In Canada, quoted mortgage rates are based on semi-annual compounding, compared with personal loans and most U.S.mortgages based on monthly compounding.