Buying vs. Renting

: In this project you will create an Excel Workbook consisting of two worksheets. You will then
use it to perform various financial calculations and answer the questions below. Specifically, it will be
used to examine whether it is better to buy a home or rent, depending on things such as income,
property, appreciation, annual percentage rate, etc. You must start from a blank Excel file, and all of
the computations must be done in Excel. If you do not follow these rules, you will get a zero on this
assignment.
Submission: Your final submission should be a pdf containing the answers to each question below, and
the Excel Workbook you created to answer the questions. Title your answers pdf as “Project 2 Answers –
(your last name)”, and title your Excel Workbook as “Project 2 Workbook – (your last name)”. Your
answers to each question should be given in complete sentences. If your answer is calculated by Excel,
reference the cell you got the answer from. If you calculated the answer by hand using a formula or
basic arithmetic, be sure to show enough work to justify your answer. The workbook will contain two
worksheets within it (details on this are given throughout the questions).
Grading: Your grade on this project is distributed as follows:
Project 2 Answers pdf: 5 points per problem, for a total of 40 points
Project 2 Workbook: Amortization Worksheet – 20 points, Analysis Worksheet – 40 points
Total for Project 2: 100 points
Project 2 – Buying versus Renting
Mortgages and Taxes: Deb and Rusty have just gotten married and wish to buy a home. They both work
in Boston and have a combined income of $90,000. They found a modest starter house which they are
buying for $350,000.
1. They plan to use their $40,000 is savings to cover the closing costs the bank will charge them,
which are 1% of the amount they borrow from the bank. The rest of the savings will be used as a
down payment. Determine the largest amount they can use for a down payment and still pay
the closing costs.
2. Using the amount Deb and Rusty have to borrow from part 1, open Excel and create a 20-year
amortization schedule, giving monthly payments for the amount they borrowed at a 4.5%
annual interest rate. You must use the pmt function in Excel to compute the monthly payment.
Title this worksheet Amortization. For your answer to this question write “See Excel Workbook”.
3. Use the amortization schedule to compute the total amount of interest they will pay to the
bank over the 20 years.
4. Create a separate worksheet from the amortization schedule. Title this worksheet Analysis. In
this worksheet, create a column titled Income starting at $90,000 and increasing at 3% for 20
years. What is their income after 20 years?
5. Next create the following columns in your new Excel worksheet. For your answer to this
question write “See Excel Workbook”.
• Property Taxes which are currently $3,100 a year and will also increase by 3% a year.
• Interest paid to the bank each year (careful here, your amortization schedule is
monthly).
6. Suppose Deb and Rusty decided to rent an apartment instead of buying a house. Create a
column that keeps track of the amount they will spend in rent every year for the next 20 years.
Assume the rent is now $1000 a month and will increase by 3% each year.
7. By renting they are saving a lot of money each year! They pay less for rent than a mortgage,
and they don’t pay property taxes. Assume the extra money (include the $40,000 in savings as
initial deposit) they have from renting versus buying is all invested at 5% a year, and every year
their extra money is added to this account. Create a column titled Extra Money. How much extra
money do they have after 20 years?
8. Assume the house increases in value by 3% a year. Create a column that gives the value of the
house for each of the 20 years they are paying the mortgage. Which option ends up with more
money for Deb and Rusty to retire on assuming they sell the house after 20 years?