Reference no: EM132978085

Question - Alice wants to live in India for 10 yrs. She considers buying a house and starts comparing her options. She is interested in a place which is priced at $500,000. The agent has offered his two choices for financing the purchase. With 20% down, she can take out a loan at 1.5% annual percent rate (APR) to be paid over next ten years. Alternately, she can rent a similar apartment for the next ten years at $3500 per month, with an option to buy it for $180,000 at the end of the lease term. Alice expects the value of the house to appreciate at an annual rate of 2%. Although not sure, she thinks a fair personal discount rate for his situation is 8% per year. She reasons that it is the target rate of return for his retirement account. After all, any extra money goes into that account with that target return rate.

a. What will be Jack's monthly payment under the buy option?

b. Should she buy or rent the condo?

c. What other concerns would you raise with leasing - use sensitivity analysis to answer this question.