A five year life present worth cost of home service is to be made by a married c

Question

A five year life present worth cost of home service is to be made by a married couple to compare purchase of a $170,000 home with renting. The purchase cost would be covered with $30,000 cash equity and a $140,000 thirty-year loan at 10% interest per year. Assume yearly end-of-year mortgage payments for simplicity. Assume the loan will be paid off at the end of year 5 when it is estimated that the home will be sold for $200,000. A 7% real estate sales commission is estimated to be paid on the sale value. Annual property taxes are estimated to be $1,700 in year 1, escalating $50 per year through year 5. Annual house insurance is estimated to be $500 with annual maintenance estimated to be $1,000. Home maintenance and insurance costs are not allowable itemized deductions, but the home loan interest and property tax will be taken as itemized deductions for federal and state income tax calculation purposes in lieu of using the married joint return standard deduction of $7,350. Assume the individual effective federal plus state tax rate is 40%. Assume that the year 5 sale value of $200,000 less real estate sale commission is not taxable per current tax law. The couple assumes that other places exist to invest money at 12% per year after-taxes and that the risk in those investments is equivalent to investing in the home. If the couple rents, assume end-of-year annual rent costs of $13,000 in years 1 and 2, $14,300 in years 3 and 4, and $15,000 in year 5. What are the present worth of the purchase cost and the rent cost?

A) PW of Purchase = $43,814; PW of Rent = $49,748
B) PW of Purchase = $43,814; PW of Rent = $46,153
C) PW of Purchase = $45,876; PW of Rent = $49,748
D) PW of Purchase = $45,876; PW of Rent = $46,153

Explanation / Answer

A five year life present worth cost of home service is to be made by a married c

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