Time value of Money versus Rent Decision Harvard Case Solution & Analysis

Time value of Money versus Rent Decision Case Study Solution

Introduction

Rebecca Young started working for an investment bank after completing her MBA.She has been under the dilemma of purchasing the new condominium at the price of $600,000 or continue to live in rented condominium with an monthly rent of $3,000. Meanwhile, she has been considering many options available to her in the investment. Whereas, she is keen in knowing the time value of money versus Rent. Because, she has been living in the condominium and paying the rent of $3000 per month. However, it is dilemma for her to purchase the new condominium for until next 5 to ten years or continue to live in a rented house, and pay rent.

It is important to know that there are many complications for her to understand, one that she would need to acquire mortgage to finance the new condominium, and pay down payment of 20%. Since, it is also concern for her that if the same amount invested on the same effective rate as the mortgage rate. Then which option would be best for. On the other hand, it can be determined that she is also keen to know about the opportunity cost in this condominium. Meanwhile, it is important to know what decision should be either to have rented condominium or the new condominium should be purchased on mortgage of 25 years with a down payment of 20%.

Problem Statement

What should be decision of the young as per the analytical tools like time value of money that either should she continue to pay rent or that she should acquire mortgage in given conditions?

Analysis

Acquisition of Mortgage

If the Rebeca Young could purchase the condominium at the price of $600,000, then one option is available to her to acquire the mortgage at rate of 4% annually with total mortgage life of 25 years. Indeed, if she acquires mortgage then it can be determined that she would need to pay an monthly payment of $2,533 monthly. Indeed, this is not simple, because she also has to pay an down payment of 20% of the principal which is equal to the $120,000, along with an additional payment like closing fees $20,00 one time, property taxes, and condo fees and monthly taxes combined around $1,400 monthly.

Opportunity cost and Payments

On the other hand, it can be determined that purchasing a new condominium would require around amount of $124,000 excluding taxes, and some other costs associated with transaction. Meanwhile, if the same amount is invested somewhere else on the same effective rate as the mortgage rate. Then she could get return of $406 monthly. Similarly, this is an opportunity cost for the Young to get return on the investment if she prefer to invest on the effective rate of 4%, then purchasing the new condominium.

Time value of Money versus Rent Decision Harvard Case Solution & Analysis

 

 

Furthermore, if we analyze the situation in deeper way, then it can be determined that beyond the down payment, and closing fees. There are some other obligations that would increase over the purchase of new condominium on the mortgage. Whereas she would need to pay a huge amount of $1,811 including condo fees, property taxes, repair and maintenance and the opportunity cost as well. Therefore, it can be determined that Rebeca young would have to pay that amount monthly..........................

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