Buec 335

Assignment 1: BUS 413 (FALL 2015)

“Time Value of Money: The Buy Versus Rent Decision”

Sean Cleary, Stephen R. Foerster

Steps:

1. Download the 2 page case from the following website. It may cost you CAD 2.1

https://www.iveycases.com/ProductView.aspx?id=67511

2. Start making calculations in Excel (all in one sheet). Cells have to be linked. Assumptions and calculations need to be clear at the beginning. I will not accept “manual” calculations in excel.

3. Answer the following questions in Excel one by one:

a. Determine the required monthly payments for the mortgage.

b. Determine the “opportunity costs”, on a monthly basis, of using the required funds for closing (i.e. down payment + all closing costs), rather than leaving those funds invested and earning the monthly effective rate determined in part (a).

c. Determine the monthly additional payments required to buy versus rent (include the monthly opportunity costs determined in part (b)).

d. Determine the principal outstanding on the mortgage after:

i. 2 years

ii. 5 years

iii. 10 years

e. Determine the net future gain or loss (NPV) after 2, 5 and 10 years under the following scenarios, which Rebecca Young has determined are possible after some “due diligence” regarding future real-estate prices in the Toronto condo market:

iv. The condo price remains unchanged

v. The condo price drops 10% over the next 2 years, then increases back to it’s purchase price by the end of 5 years, then increases by a total of 10% from the original purchase price by the end of 10 years

vi. The condo price increases annually by the annual inflation rate of 2% per year over the next 10 years

vii. The condo price increases annually by an annual rate of 5% per year over the next 10 years

f. As Rebecca Young, what decision would you make? Describe any qualitative considerations that could factor into your...