Question

Valuation fundamentals Personal Finance Problem Imagine 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 4 years you will have to pay property taxes and maintenance expenditures of about $6,000 per year, but you will avoid paying rent of $10,000 per year. When you graduate 4 years from now, you expect to sell the condo for $123,000 after taxes. If you buy the condo, you will use money you have saved that is currently invested and earning a 7% 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.)

Answer 1

Solutions (a) Timeline cash flows | 4000 4000 4000 127000 Net cash flow each year = Amount saved - lease amount to00-6000 = 4000 At Lpth year = 123000+4000 127000 Maximum price = Prof cash flows. (6) cin CH?)?(173) 27 (tajn I 4000 & 4000 4000 & 127000 (140.07) (1+0.07) 2 (10.07)? (HooD4 4000, 4000 + 4000 + 127000 1.07 1.1449 +225043 1.31079 3138.3177 +3493.7549+ 3265.1915th 361 = 107385.4009