Question

This project requires you to compare renting versus owning a home. Assume a property can be rented for $13,200 per year ($1,100 per month) or purchased for $160,000 with $30,000 down and financed with a fully amortizing mortgage loan of $130,000 at 3 percent interest for 30 years. Other costs associated with owning include maintenance costs of $500, insurance costs of $500, and property taxes of 3 percent of the purchase price. Assume the federal income tax rate is 22 percent. Growth rates for expenses (insurance, maintenance, property taxes), rents, and property value are a constant 2 percent per year. After five years, the property will be sold. Selling expenses of 5 percent would have to be paid at that time.

Be sure to show your work in Excel. In other words, do not simply type values into the boxes, but reference prior cells when calculating results. In your report, identify how much money is saved from owning relative to renting after selling the house in year 5. If an annual after-tax return of 15 percent is available on an investment of comparable risk, which is the better option, owning or renting?

Part 3: Cash Flow Analysis

Fill in the cash flow tables. Property taxes in year 1 are calculated as purchase price * property tax rate. Property taxes in future years grow at 2 percent per year. Note that tax deductions include property taxes and interest. Tax savings are calculated as total tax deductions * income tax rate. After-tax cash flows are calculated as tax savings – cash outflows before taxes. After tax cash flows from owning are calculated as after-tax cash flows + rent saved. Before-tax cash flow from sale can be calculated property value – selling costs – mortgage balance. The after-tax cash flow from sales are identical to the before-tax cash flow from sales due to exclusions. (25 points)

Part 3) Cash Flow Analysis
Before-Tax Cash Flows-Owner
Year	1	2	3	4	5
Property taxes						Hint: Use the FV formula for one period
Insurance						Hint: Use the FV formula for one period
Maintenance						Hint: Use the FV formula for one period
Principal and Interest						Hint: The annual payment on the loan
Cash Outflows before taxes						Hint: Sum the values above
Tax Deductions-Owner
Year	1	2	3	4	5
Property taxes						Hint: Reference same values calculate above
Interest						Hint: Reference same values from the yearly summary loan schedule
Total tax deductions						Hint: Sum of property taxes and interest
Tax savings						Hint: Total tax deductions * income tax rate
Rents
Year	1	2	3	4	5
Rents						Hint: Reference same values from yearly property data above
Net Cash Flows-Owning
Year	1	2	3	4	5
Cash outflows before taxes						Hint: Reference from above
Tax savings						Hint: Reference from above
After-tax cash flows						Hint: Tax savings - cash outflows before taxes
Rent saved (Rents)						Hint: Reference from above
After tax cash flows-owning						Hint: After-tax cash flows + Rent saved
Before-Tax Cash Flows-Sales
Year	1	2	3	4	5
Property value
Selling costs
Mortgage balance (Balance)
Before-tax cash flow from sale
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