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# 1. 2. 3. If you rent a 1,000 sq ft two-bedroom apartment in RTP area, your monthly rent will be \$900. The apartment is in move-in condition. You...

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How do you calculate the incremental cash flows to answer the question?

If you rent a 1,000 sq ft two-bedroom apartment in RTP area, your monthly rent will be \$900. The apartment is in move-in condition. You won’t have any upfront expenses when you move in.
If you want to buy a house, a 2,000 sq ft three-bedroom townhouse in RTP area is sold at \$200,000. To get your application for mortgage approved by a bank, you need to pay 20% down payment. In
addition, there is \$2,000 closing cost. Your mortgage bank gives you two offers for mortgage. Offer one is a 30-years fixed-rate mortgage at 3.88% APR. Offer two is a five-year ﬂoating-rate mortgage, ARM 52‘1, at 2.88% interest rate.
A townhouse owner needs to pay \$80 HOA fee each month. In addition, the property tax and house insurance together are about 1.5% of house value. In addition, you make the following assumptions to snnplify the situation:
1. Suppose you will live in an apartment or a townhouse for five years only. After year ﬁve, you will either buy a larger single family house or move to another place. That means you need to resell your house at year five.
2. Currently, the US house market is close to bottom. 50 you expect in next five years, the market value of your house will increase the same as inﬂation rate. Based on the knowledge you’ve
learned from economics courses, you think inflation rate might be around 3% in next five years. That implies your house value will increase at 3% each year.
3. The utility expense of a townhouse will be higher than that of an apartment. However, considering that the interest part of your monthly mortgage payment is tax-deductible, you simply
assume the extra utility expense of a townhouse and the tax-saving due to mortgage interest
expense are canceled out. That means you don’t need to consider utility when you do your quantitative analysis.
4. If your resale price is higher than your purchase price, you make a profit from your sales of the house. The profit will be taxed at 15%. You will pay \$6,000 transaction costs when you resell the house.
5. At time when you resell your house, your mortgage is not paid off yet. So you have to use the sales proceeds to pay off your mortgage ﬁrst. You can ﬁnd how much mortgage balance remains
unpaid by checking the mortgage amortization table at wwwbankratecom. Go to this website,
click “calculatorfmortgage calculator&quot;, then input your mortgage information and calculate
monthly payment, lastly, click “amortization table”, you will find your mortgage balance at end of year five.
6. Your opportunity cost [required rate of return) is 8% Requirements
You need to use spreadsheet to do capital budgeting analysis and write a two-page case report to answer the following questions. 1. Based on the above information, do you want to buy a house? Why?

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