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Posted: August 28th, 2022
AEM 4620: Advanced Financial Modeling and Analysis
Case 1 – Time Value of Money: The Buy versus Rent Decision
(13 points total)
1. (0.5 pts) Determine the required monthly payments for the mortgage.
2. (0.5 pts) Determine the “opportunity” costs, on a monthly basis, of using the required funds for
closing (i.e., down payment plus all closing costs), rather than leaving those funds invested and
earning the monthly effective rate (assumed to be equivalent to the mortgage rate).
3. (0.5 pts) Determine the additional monthly payments required to buy the condominium
compared to renting (including opportunity costs).
4. (1.5 pts) Determine the principal outstanding on the mortgage after:
o Two years
o Five years
o Ten years
5. Determine the “net” future gain or loss after two, five, and ten years under the following
scenarios:
o (2 pts) The condo price remains unchanged.
o (2 pts) The condo price drops 10% over the next two years, then increases back to its
purchase price by the end of five years, then increases by a total of 10% from the
original purchase price by the end of 10 years.
o (2 pts) The condo price increases annually by the annual rate of inflation of 2% per year
over the next 10 years.
o (2 pts) The condo price increases annually by an annual rate of 5% per year over the
next 10 years.
6. (2 pts) As Rebecca Yong, what decision would you make? Describe any qualitative
considerations that could factor into your decision.
AEM 4620: Advanced Financial Modeling and Analysis
Case 1 – Time Value of Money: The Buy versus Rent Decision
(13 points total)
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