2. Amy is choosing between two apartments. Apartment A is selling at ¥ 9 million, and apartment B is selling at ¥ 11 million. She can take a 30-year mortgage to finance 70% of the price with an interest rate of 5.145% (APR). Other than the down payment, she needs to pay a total transaction fee (taxes, commission, etc.) equaling 2% of the purchase price. She plans to sell the apartment after 3 years. In the meantime, she does not plan to live in this apartment, and she can rent it out. Apartment A is expected to generate a rent of ¥ 8000 per month, and apartment B is expected to generate a rent of ¥ 12,000 per month. After 3 years, she expects to sell apartment A for ¥11.5 million or apartment B for ¥13 million, and pre-pay the outstanding balance of her mortgage. Suppose her opportunity cost of capital is 7.2% (that is, she can invest the cash elsewhere and make 7.2% per year in term of APR, monthly compounding). (1) What are her monthly payments for the two apartments? (2) What is the NPV if she purchases apartment A? (Hint: for each month, mortgage payment is the cash outflow, and the rent is the cash inflow) (3) What is the NPV if she purchases apartment B? ((Hint: for each month, mortgage payment is the cash outflow, and the rent is the cash inflow)) (4) Which apartment should she choose?
2. Amy is choosing between two apartments. Apartment A is selling at ¥ 9 million, and apartment B is selling at ¥ 11 million. She can take a 30-year mortgage to finance 70% of the price with an interest rate of 5.145% (APR). Other than the down payment, she needs to pay a total transaction fee (taxes, commission, etc.) equaling 2% of the purchase price. She plans to sell the apartment after 3 years. In the meantime, she does not plan to live in this apartment, and she can rent it out. Apartment A is expected to generate a rent of ¥ 8000 per month, and apartment B is expected to generate a rent of ¥ 12,000 per month. After 3 years, she expects to sell apartment A for ¥11.5 million or apartment B for ¥13 million, and pre-pay the outstanding balance of her mortgage. Suppose her opportunity cost of capital is 7.2% (that is, she can invest the cash elsewhere and make 7.2% per year in term of APR, monthly compounding). (1) What are her monthly payments for the two apartments? (2) What is the NPV if she purchases apartment A? (Hint: for each month, mortgage payment is the cash outflow, and the rent is the cash inflow) (3) What is the NPV if she purchases apartment B? ((Hint: for each month, mortgage payment is the cash outflow, and the rent is the cash inflow)) (4) Which apartment should she choose?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:2. Amy is choosing between two apartments. Apartment A is selling at ¥ 9 million, and apartment B is
selling at ¥ 11 million. She can take a 30-year mortgage to finance 70% of the price with an interest rate
of 5.145% (APR). Other than the down payment, she needs to pay a total transaction fee (taxes,
commission, etc.) equaling 2% of the purchase price. She plans to sell the apartment after 3 years. In the
meantime, she does not plan to live in this apartment, and she can rent it out. Apartment A is expected
to generate a rent of ¥ 8000 per month, and apartment B is expected to generate a rent of ¥ 12,000
per month. After 3 years, she expects to sell apartment A for ¥11.5 million or apartment B for ¥13
million, and pre-pay the outstanding balance of her mortgage. Suppose her opportunity cost of capital is
7.2% (that is, she can invest the cash elsewhere and make 7.2% per year in term of APR, monthly
compounding).
(1) What are her monthly payments for the two apartments?
(2) What is the NPV if she purchases apartment A? (Hint: for each month, mortgage payment is the cash
outflow, and the rent is the cash inflow)
(3) What is the NPV if she purchases apartment B? ((Hint: for each month, mortgage payment is the cash
outflow, and the rent is the cash inflow))
(4) Which apartment should she choose?
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