Question

Economics of Strategy

Facts:

Property: Tierra Catalina, near la Encantada, 2 Bed/2 Bath

Rent Value: $1300 / month

Sale value: 180,000

Savings: $25,000

Broker promised interest rate: 7%

Bank loan: Amt: 155,000, 15 Year period, at 5%

Maintenance: $1,000/yr regular + $5,000/yr extraordinary (10% probability)

Sale Broker Commission: 3%

Leave and close shop after 5 years

Sell value of 200,000, five years from now.

Real Estate Tax: 1.25% of Sale Value

Annuity formula: NPV = (A / r ) * { 1 – (1+r)^(-n) }

Go online and find your realistic dream car (e.g. not a Porsche). Use KBB to make realistic assumptions on the resale value of the car three years from now. Assume a 7% discount rate, assume you will sell the car in three years. Using an NPV analysis, compare the three most typical purchase options:
(a) purchasing the vehicle with cash, including the cash bonus offers
(b) purchasing the vehicle using the company’s 60 month financing offer (c) using the company’s lease option

Answer 1