50.1K

Verified Solution

Link Copied!

Valuation fundamentalsPersonal Finance ProblemImagine that you are trying to evaluate the economics of purchasing a condominium to live in during college rather than renting an appartment. If you buy the condo, during each of the next

44

years you will have to pay property taxes and maintenance expenditures of about

$6 comma 0006,000

per year, but you will avoid paying rent of

$10 comma 00010,000

per year. When you graduate

44

years from now, you expect to sell the condo for

$126 comma 000126,000

after taxes. If you buy the condo, you will use money you have saved that is currently invested and earning a

66%

annual after-tax rate of return. Assume for simplicity that all cash flows (rent, maintenance, etc.) would occur at the end of each year.

a.Draw a timeline showing the cash flows, their timing, and the required return applicable to valuing the condo.

b.What is the maximum price you would be willing to pay to acquire the condo? Explain.

a.Identify the cash flows, their timing, and the required return applicable to valuing the condo.

The amount of the property taxes and maintenance expenditures,

CF,

associated with the purchase of the condo is

$_____ .

(Round to the nearest dollar.)The amount saved on rent is

$______ .

(Round to the nearest dollar.)The amount,

FV Subscript nFVn,

for which you assume you can sell the condo at the end of the ownership period is

$________.

(Round to the nearest dollar.)The number of years,

you intend to own the condo is _________

years.(Type a whole number.)The minimum after-tax required rate of return,

you need in order to justify removing funds from your savings account is

____ %.

(Type a whole percentage.)

b. The maximum price you would be willing to pay to acquire the condo is

$___

(Round to the nearest cent.)

Answer & Explanation Solved by verified expert

See Answer