Reference no: EM132967003

A family currently live in an apartment whose monthly rent is $1050. They are thinking of buying a house which would cost $250,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a downpayment of $25,000 and finance the balance through a mortgage at 3% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal and interest) at the end of each year for the next 5 years The house will have the following additional expenses: annual maintenance: $1500; Property taxes:$5500; Insurance: $1200. Assume they are in tax bracket of 20% and the price of home, rent and expenditure increases by 2% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage.

Problem 1: Calculate Ownership Operating Advantage in year 3.

Option 1: ($39,924)
Option 2: ($43,230)
Option 3: ($43,874)
Option 4: ($41,631)