Time Value of Money Assignment
CASE STUDY ON TIME VALUE OF MONEY In Might 2019, Priyanka accomplished her MBA and moved to Toronto for a brand new job in funding banking. There, she rented a spacious, two-bedroom condominium for $three,000 per 30 days, which included parking however not utilities or cable tv. In July 2014, the just about equivalent unit subsequent door grew to become accessible on the market with an asking worth of $620,000, and Priyanka believed she might buy it for $600,000. She realized she was dealing with the traditional buy-versus-rent choice. It was time for her to use a number of the analytical instruments she had acquired in enterprise college — together with “time worth of cash” ideas — to her private life. Whereas Priyanka actually appreciated the condominium unit she was renting, in addition to the condominium constructing itself, she felt that it might be insufficient for her long-term wants, as she deliberate to maneuver to a home and even to a bigger penthouse condominium inside 5 to 10 years — even sooner if her job continued to work out nicely. Family and friends had given Priyanka quite a lot of blended opinions regarding the buy-versus-rent debate, starting from “you’re throwing your cash away on lease” to “it’s higher to maintain issues as low cost and versatile as attainable till you might be able to settle in for good.” She realized that each side introduced good arguments, however she needed to research the buy-versus-rent choice from a quantitative viewpoint so as to present some context for the qualitative concerns that may finally be a serious a part of her choice. FINANCIAL DETAILS If Priyanka bought the brand new condominium, she would pay month-to-month condominium charges of $1,055 per 30 days, plus property taxes of $300 per 30 days on the unit. Not like when renting, she would even be chargeable for repairs and basic upkeep, which she estimated would common $600 per 12 months. If she determined to buy the brand new unit, Priyanka meant to supply a money down cost of 20 per cent of the acquisition worth. There was additionally a neighborhood deed-transfer tax of roughly 1.5 per cent of the acquisition worth, and a provincial deed-transfer tax of 1.5 per cent, each due on the acquisition date.(For simplicity, Priyanka deliberate to initially ignore some other tax concerns all through her evaluation.) Different closing charges have been estimated to be round $2,000. With a purpose to finance the remaining 80 per cent of the acquisition worth, Priyanka contacted a number of lenders and located that she would be capable of receive a mortgage at a four per cent “quoted” annual charge ( In Canada, quoted mortgage charges are primarily based on semi-annual compounding, in contrast with private loans and most U.S. mortgages primarily based on month-to-month compounding)that may be locked in for a 10-year time period and that she would amortize the mortgage over 25 years, with month-to-month funds. The cash that Priyanka was planning to make use of for her down cost and shutting prices was presently invested and was incomes the identical efficient month-to-month charge of return as she could be paying on her mortgage. Priyanka assumed that if she have been to promote the condominium — say, within the subsequent two to 10 years - she would pay 5 per cent of the promoting worth to realtor charges plus $2,000 in different closing charges. SCENARIO ANALYSIS With a purpose to full a monetary evaluation of the buy-versus-rent choice, Priyanka realized that her first activity could be to find out the required month-to-month mortgage funds. Subsequent, she needed to find out the chance price (on a month-to-month foundation) of utilizing the lump-sum required funds for the condominium buy moderately than leaving these funds invested and incomes the efficient month-to-month charge, assumed to be equal to the mortgage charge. She would then be capable of decide extra month-to-month funds required to purchase the condominium in comparison with renting, together with the opportunitycost. Priyanka needed to contemplate what may occur if she selected to promote the condominium at a future date. She was assured that any re-sell wouldn't occur for no less than two years, nevertheless it might definitely occur in 5 or 10 years’ time. She wanted to mannequin the quantity of the excellent principal at varied factors sooner or later — two, 5 or 10 years from now. She then needed to find out the online future acquire or loss after two, 5 and 10 years beneath the next eventualities, which she had decided have been attainable after some due diligence relating to future real-estate costs within the Toronto condominium market: (a) The condominium worth stays unchanged; (b) The condominium worth drops 10 per cent over the following two years, then will increase again to its buy worth by the top of 5 years, then will increase by a complete of 10 per cent from the unique buy worth by the top of 10 years; (c) The condominium worth will increase yearly by the annual charge of inflation of two per cent per 12 months over the following 10 years; and (d) The condominium worth will increase yearly by an annual charge of 5 per cent per 12 months over the following 10years. FINAL CONSIDERATIONS Priyanka realized she had a troublesome choice forward of her, however she was well-trained to make all these choices. She additionally acknowledged that her choice wouldn't be primarily based on quantitative components alone; it might should be primarily based on any qualitative concerns as nicely. She knew she wanted to behave quickly as a result of condominiums have been promoting pretty shortly, and he or she would wish to rearrange to finance and get in touch with a lawyer to help in any paperwork if she determined to purchase. Get Finance homework help at present