Stedman Case

1303 Words6 Pages
1. The Linton family faces a very common decision. Their landlord has raised their monthly rent substantially and they must make a decision about whether to stay or leave given the increase. They have narrowed the decision to two options – stay in the current home and accept the increased rent or buy the home next door. Rent If they choose to rent, they are incurring a substantial rent increase over 5 years that is essentially a sunk cost. Mr. Linton is a resident so we can assume that his paycheck is modest and that Mrs. Linton would bare the majority of the rent increase. On the other hand, continuing to rent would eliminates the time, cost, upfront investment and risk of considering a home purchase. The landowner has also promised…show more content…
Factoring in the additional expected maintenance, insurance, and taxes to the monthly payment, the total monthly payment is $3474, slightly under $3600 rental payment. That said, a slightly lower monthly payment is the only positive aspect of purchasing instead of continuing to rent. Projections and historical data do not bode well for the purchase in the next five years. Assuming no price appreciation (based on historical observation, the exhibits, and accountant), the present value of owning v. renting is $7680 and the net present value is negative. Given that investment required is so large, the risk is not worth the predicted outcome. This investment virtually depletes the Linton’s nest egg which I would not recommend given that Mr. Linton is still a student and there is some uncertainty regarding their financial needs over the next 5 years due to the limited incoming cash flow. Based on no price appreciation, the estimated net cash if home is sold in 5 years is estimated at $84k, which is lower than the initial investment of 120k. Important to consider is opportunity cost of this investment. To recover investment, Lintons would need a price appreciation of more than 2% for gains on the investment. The Lintons are better off investing their money in another financial vehicle where they can get a similar or greater return with less risk. Home purchase | | | Purchase price | $ 600,000.00 | |
Open Document