PFIN 3rd Edition by Lawrence Gitman,Michael Joehnk,Randall Billingsley

Exercise 6

Use Worksheet 5.2. Aurelia Montenegro 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. Aurelia estimated the following costs as a percentage of the home's price: property taxes, 2.5 percent; homeowner's insurance, 0.5 percent; and maintenance, 0.7 percent. She is in the 25 percent tax bracket. Using Worksheet 5.2, calculate the cost of each alternative and recommend the least costly option-rent or buy-for Aurelia.