PFIN 2nd Edition by Lawrence Gitman ,Michael Joehnk,Randall Billingsley

Exercise 5

Use Worksheet 5.2. Celia Hernandez is currently renting an apartment for $725 per month and paying $275 annually for renter's insurance. She just found a small townhouse she can buy for $185,000. She has enough cash for a $10,000 down payment and $4,000 in closing costs. Celia estimated the following costs as a percentage of the home's price: property taxes, 2.5%; homeowner's insurance,.5%; and maintenance,.7%. She is in the 25% tax bracket. Using Worksheet 5.2, calculate the cost of each alternative and recommend the least costly option-rent or buy-for Celia.