You are planning to live in the city of Houston, Texas for 7 years. You are deci
ID: 2420886 • Letter: Y
Question
You are planning to live in the city of Houston, Texas for 7 years. You are deciding to rent or to buy a house for this 7-year period Rent: Monthly rental cost will be $2,500 paid at the end of each month. Buy: The purchase price of the house you intend to buy is $250,000. You will pay cash. You believe you can sell the house for $325,000 at the end of 7 years. Which option (buy or rent) is better, and by how much? The interest rate is 12% COMPOUNDED MONTHLY. Ignore income taxes. Also ignore any other factors not specifically mentioned in the data above.
Explanation / Answer
cash outflow as per rent basis in 7 years =$ 2500*56.648 (AVFI for 84 periods @1%)
=$ 141,620.00
cash outflow as per intend buy process = $ 250,000- $ 325,000* .434 ( PVF for 84 th period )
= $ 250,000- $ 141,050
= $ 108,950
so buying option is better then the rent option
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