Reference no: EM13162509
Q.1 Dick and Jane are living in a two-bedroom unit in an apartment complex that has a swimming pool, spa, fitness center, and tennis court. They are paying $1,350 a month for rent. They learned earlier this year that they are going to have a baby later in the year, so they started looking for a bigger place and found a three-bedroom condominium of a move-in condition in a nearby neighborhood with the price of $320,000.
The condominium does not have any of the amenities that the current apartment has, such as swimming pool, spa, fitness center, and tennis court. Unlike the current apartment, however, the condominium has individual laundry room inside, so they do not have to go out to the laundry facility that is shared with other residents. With an arrival of new baby, they figure that they have to run about four batches of laundry per week, i.e. 16 batches of laundry per month. Each batch of laundry will take about 15 more minutes with shared laundry facility than with the individual laundry room that comes with condominium. They also assess the fair value of their time to be $20 dollars an hour. In the apartment, they pay money every time they use the washer and drier of the laundry facility, but the money cost can be ignored because they need to buy washer and drier if they move to the condominium.
They have $70,000 savings that they can use for 20% down payment ($64,000) and closing cost of about $6,000. From $70,000 savings, they are currently earning $60 interest per month. With $256,000 loan and current 30-year fixed mortgage rate, they will have to pay $1,400 per month. They also have to pay $200 association fee per month. The monthly payment for homeowner's insurance is $90. Furthermore, they estimate that the repair and maintenance will cost them about $100 per month on average. Considering the current situation of housing market in general and the area that the property is located, there is a good chance that the price of the condominium will rise significantly over next ten years.
Dick and Jane know that the annual property tax rate is 1% of the property value. They found, however, that the amount of property tax that they will have to pay for the condominium is close to the tax savings from the Federal income tax because of the itemized deduction of mortgage interest payment. In other words, they can ignore the tax implication of the alternative housing options.
Based on this situation, answer the following two questions.
1. After considering these factors, Dick and Jane decided to buy the condominium. The aimed benefit from this decision is to have a bigger place to live, time savings from laundry, and a potential for an appreciation of home value. What is the opportunity cost of the decision to take these benefits from buying the condominium? You need to itemize all the components of the opportunity cost, and quantify, in dollar amo1unt, each component of the opportunity cost. You need to provide the justification for the dollar amount that you come up with. If necessary, you may make assumptions about certain quantitative aspects of the given situation. If you make assumptions that contradict the descriptions given above, you may lose some points. The opportunity cost must be assessed over the period of one year.
2. After considering these factors, Dick and Jane decided to stay in the apartment. The aimed benefit from this decision is to have a better cash flow each month and to enjoy the amenities that the apartment complex provides. What is the opportunity cost of the decision to take these benefits from staying in the apartment? You need to itemize all the components of the opportunity cost, and quantify, in dollar amount, each component of the opportunity cost. You need to provide the justification for the dollar amount that you come up with. If necessary, you may make assumptions about certain quantitative aspects of the given situation. If you make assumptions that contradict the descriptions given above, you may lose some points. The opportunity cost must be assessed over the period of one year.