Own or rent analysis. Linda wants to purchase a property at the beginning of 2019 and...

Own or rent analysis. Linda wants to purchase a property at the beginning of 2019 and plans to sell at the end of 2019. The loan payment is by annual and is fully amortizing FRM. The information for analysis is as below:

Property purchase price at the beginning of 2019	$200,000
LTV Ratio	80%
Annual Interest rate	6%
Loan term	30 years
Annual rent	$15,000
Property sell price at the end of 2019	$235,000
Annual insurance	$500
Annual maintenance	$500
Marginal tax rate	28%
Property tax rate	1.50% based on the purchase price at the beginning of 2019
Annual discount rate	12%
Selling expense	6% of sell price at the end of 2019
No sales tax

Please answer the question of whether Linda needs to make the purchase by calculating the cost of owning, benefit of owning, the NPV and IRR of this purchase.

Expert Solution



Purchase Price of Machine	200000
Loan to Value of Machine	80%
Loan Availment	160000
Principal Inception	40000
Annual Interest Rate	6%
Annual Discount Rate	12%

Loan Repayment Installment By-annually	80000
Interest for First Six Month	4800
Interest for Next Six Month	2400

Present Value of Loan and Interest Repayment at Half yearly @12%	80000
Present Value of Loan and Interest Repayment at year end @ 12%	73571
Present Value of Loan and Interest Repayment at Half yearly @15%	78884
Present Value of Loan and Interest Repayment at year end @ 15%	71652
Present Value of Loan and Interest Repayment at Half yearly @20%	77091
Present Value of Loan and Interest Repayment at year end @ 20%	68667
Present Value of Loan and Interest Repayment at Half yearly @25%	75378
Present Value of Loan and Interest Repayment at year end @ 25%	65920

Sale Value	235000
Annual Rent	15000
Total Receipt at year end	250000
Selling Expense 6% of Sale Value	14100
Annual Maintenance	500
Annual Insurance	500
Property Tax (1.5% of opening value of property)	3000
Interest Expense	7200
Purchase price of property	200000
Profit for the year	24700
Tax @ 28%	6916
Profit after tax	17784
Cash Realisation at year end	224984
Present value of cash realization at year end @ 12%	200879
Present value of cash Outflow @ 12%	193571
Net Present Value @12%	7307
ROI @ 12%	18.27%

Present value of cash realization at year end @ 15%	195638
Present value of cash Outflow @ 15%	190536
Net Present Value @15%	5102


Present value of cash realization at year end @ 20%	187487
Present value of cash Outflow @ 20%	185758
Net Present Value @20%	1729


Present value of cash realization at year end @ 25%	179987
Present value of cash Outflow @ 25%	181298
Net Present Value @25%	-1311

IRR	22.84389803
20%+[NPV @ 20%/(NPV @ 20% LESS NPV @ 25%) *5

We should go for buy option

ekkarill92 answered 2 years ago

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