Reference no: EM131317074
You are considering an option to purchase or rent a single-family residential property in Destin, FL. You can rent it for $13,500 per year, and the owner would be responsible for maintenance, property insurance, and property taxes. Alternatively, you can purchase this property for $255,000 and finance it with an 90% mortgage loan at 6% interest that will partially amortize over a 30-year period with a remaining balance of $35,000. The loan can be prepaid at any time with no penalty.
You have done research in the market area and found that:
(1) Properties have appreciated at an annual rate of approximately 10% per year, and you expect this trend to continue for the next 5 years given excess demand in the housing submarket. Beginning in year 6, you anticipate that house price appreciation will revert to its steady state at 5% per year.
(2) Rents on similar properties have increased at 5% annually, and you anticipate that rent appreciation will remain fixed at this level for the foreseeable future.
(3) You will be required to purchase private mortgage insurance from a third party insurer since your down payment is less than the required 20%. Based on the size of your down payment and credit score, the insurer has quoted you an insurance rate of 0.75% per year of the original loan amount. Once the loan-to-value ratio falls to 80%, assume that you will request cancellation of the private mortgage insurance.
(4) Maintenance is currently $2,750 and is expected to increase by 3% each year.
(5) You are in a 28% marginal tax rate.
(6) You plan on occupying the property as your primary residence for the next 10 years.
(7) The capital gains exclusion for a single individual would apply when you sell the property.
(8) Selling costs would be 10% in the year of sale.
(9) Property taxes have generally been about 2% of property value each year
Given the above information,
a) In order to earn a 20 percent IRR after taxes on your equity, should you buy the property or rent it for a 10-year period?
b) Suppose your expected period of ownership was to change to 15 years. Would owning or renting be better if you wanted to earn a 20 percent IRR after taxes?
c) Suppose the loan was fully amortizing rather than partially amortizing. How would your answer to part (b) change?
|
Develop the depreciation using the marcs method
: Compute the second-year depreciation for this asset using: Then develop the depreciation using the MARCS method.
|
|
Bondholder rate of return and the bond yield to maturity
: What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?
|
|
What must the coupon rate be on bonds
: Barnes Enterprises has bonds on the market making annual payments, with 16 years to maturity, a par value of $1,000, and a price of $968. At this price, the bonds yield 8 percent. What must the coupon rate be on the bonds?
|
|
Compute the standard estimator of volatility parameter
: Consider the following collection of n=9 closing prices for stock ABC: 101.02, 102.23, 100.34, 99.87, 98.65, 96.45, 98.45, 99.00, 100.05. Compute the standard estimator of the volatility parameter \sigma using these closing prices.
|
|
Properties have appreciated at annual rate of approximately
: You are considering an option to purchase or rent a single-family residential property in Destin, FL. You can rent it for $13,500 per year, and the owner would be responsible for maintenance, property insurance, and property taxes. Properties have ap..
|
|
Consistently predict either the direction of stock market
: “No one can consistently predict either the direction of the stock market or the relative attractiveness of individual stocks and thus no one can consistently obtain better overall returns than the market. What are the weaknesses of this argument?
|
|
Using sum-of-the-years depreciation method
: Using Sum-of-the-years (SOYD) depreciation method, develop a depreciation schedule for this asset.
|
|
What is the project irr if forecast is correct
: Upon seeing such a high IRR, the mayor of Detroit seeks a second opinion and hires Dan as a consultant. Dan is an aquarium expert and believes that Detroit's aquarium will only generate $1 million in cash flows for the first three years in operation,..
|
|
Deciding whether or not to build an aquarium
: The city of Detroit is deciding whether or not to build an aquarium. Officials believe that a world-class stingray exhibit will attract families from across Michigan to visit the city. In turn, this will spur local businesses, lead to economic growth..
|