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Please prepare an Excel analysis comparing the buy and rent options, assuming a 5% of appreciation.(Summarize to annual periods rather than monthly.) Make the worksheet flexible so that variables can change.The spreadsheet should take into account the time value of money (use 6% as a discount rate) and appropriate after-tax calculations

Stedman Place: Buy or Rent? Tul'llhen Beth Linton read the letter from her landlord in July 2-306, she was more than a bit surprised. He had written to inform Beth and her husband, Ion, that he was raising their rent from $3M a month to 353.6% on the townhouse they rented at 12 Stedman Place in Newton, a western suburb of Boston, Massachusetts. He pointed out that the 20% increase, while large, had followed years of very modest, if any, rent increases. With house prices rising so dramatically in the Boston area (see Exhibits 1 and 2}, he had to raise the rent to make it worthwhile to continue to rent out the townhouse; othenvise, he might as well sell the property. However, the landlord had committed in his letter to raising future rents by no more than overall ination as long as the Lintons chose to rent. Beth and Jon had lived at 12 Stedman Place for the last two years. They liked being outside the city, yet within easy commuting distance to downtown, where both worked Beth as an associate at a big Boston law rm and Jon as a new third year resident in general surgery at one of the Harvard teaching hospitals. As much as they liked the townhouse, Beth and Ion struggled with how to respond. Should they bite the bullet and pay the extra $601] a month? Should they look for another home to rent? Or should they consider buying. After all, Beth's father had always been an advocate of homeownership. \"Don't throw away money on rent when you can buy a house and build equity,\" he would frequently argue- indeed, he had done very well over the years investing in real estate. Luckily, Beth and Jon did not have to look far for other options. The nearly identical townhouse next door at 14 Stedman Plaoe was on the market for $62,l]. It too had three bedrooms and two bathrooms, a state-of-the-art kitchen, and a deck overlooking a small yard. Initial inquiries with the listing broker revealed that it would likely cost them no more than $600,0 to buy. But was it worth buying? 1would owning a $6011},0 home end up costing them more than renting their current home for $3600 a month? To help them think through this decision certainly the biggest nancial decision they had ever made Beth and Ion consulted their accountant, Susan Koster. At the meeting, Koster reviewed the costs of homeownership. Mortgage. The Lintons would need to make a down-payment, which Koster recommended should be at least 20% of the purchase price. Beth and Ion presently had savings of $15, that they had invested in treaSury bonds with an approximate maturity of five years. These bonds were yielding 43'5\".) per armum on a pretax basis. They would have to sell $120, worth of these bonds to fund the downpayment, which would leave them with a nest egg of $30,00D. Koster recommended financing the remainder of the purchase price with a thirtyyear mortgage. She recommended that they take out an \"interest-only\" mortgage, one in which there would be no amortization of principal in the rst ve years so that the entire payment would be comprised of interest on the $400,000 loan. The interest rate would be fixed for ve years, after which the loan would convert to a one-year adjustable rate mortgage and be paid off over the ensuing 25 years, without any penalty for pre payment. The interest rate for the first five years would be 6.0% per annum assuming they chose not to pay any upfront \"points.\"1 This initial rate would be the only rate that mattered to Beth and Ion because they would sell the house and move back to northern California once Ion had completed his residency in five years. Closing Costs. Kosher estimated that closing costs, such as legal fees, home inspection, and title search, would add up to about $4,500. Property Taxes. Koster pointed out that they would have to pay property taxes at a rate of $9.36 per thousand dollars of assessed value. The current annual property tax was $5.59? based on an assessed value of $598,000. Property taxes were likely to rise with assessed values. Like mortgage interest costs, property taxes were deductible from taxable income at the federal level. In 2005, the Lintons had paid federal taxes equal to approximately 24% of their income, although their federal tax bracket was 33% and Koster believed that they would remain in the 33% federal tax bracket for the foreseeable future. Maintenance. The Lintons would also have to factor in ongoing maintenanoe expenses such as plumbing, electrical, roofing, etc. These she estimated at $6,000 based on a newspaper article she once read reporting that, on average, each year homeowners spent about 1% of the value of the home on maintenance. These costs would likely rise with overall inflation, which were about 3% per year. Home Insurance. Based on a quick call to her insurance broker, Koster estimated that home insuranoe would cost about $1200 in the rst year. The policy included a provision that would increase premiums by 5% per annum. Sale Price. Koster pointed out that the Lintons should take into account the price at which they would be able to sell their home in five years. She suggested that they be cautious and not rely on much price appreciation. After a big runup in housing prices over the last decade (see Exhibits 1 and 2), there had recently been some softening in the housing market. Some observers even thought that there was a housing bubble and that prioes might go down over the next few years. Regardless, they should factor in paying a brokerage commission of 5% when the time came to sell. In principle, they might also have to pay a capital gains tax of 15%, but only if the capital gain exceeded $500,000, a highly unlikely event over the next ve years. The meeting with Susan Koster had helped Beth and Jon understand the costs of home ownership- But, Koster fell short of making a clearcut recommendation, leaving them to judge for themselves whether to agree to the rent increase sought by the landlord, or to try instead to purchase the townhouse next door. Exhibit 1 Boston Area House Price Index 300 250 Housing Prices 200 Rents Price/Rent Ratio Index (Base Year = 1988) 150 Consumer Price Index 100 50 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: Compiled by casewriters with data fraom U.S. Office of Federal Housing Enterprise Oversight http://www.ofheo.gov/HPIMSA.asp?FormMode=Process and Bureau of Labor Statistics, http://www.bls.gov/cpi/#data Exhibit 2 Newton, MA Single Family Home and Condominium Median Sales Price $800,000 Single Family $600,000 Condominium $400,000 $200,000 $0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

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