Section 12: Real Estate and Lending 131
An alternative would be to rent a similar dwelling at $400 per month and to
invest the difference between the purchase cost and rent at 6¼% interest. Your
personal income tax rate (marginal) is 25% Federal and 5% State. Which
alternative is more financially attractive?
By purchasing a house, you would gain $10,858.08 (32,391.87 – 21,533.79) over
an alternate investment at 6.25% interest.
Deferred Annuities
Sometimes transactions are established where payments do not begin for a
specified number of periods; the payments are deferred. The technique for
calculating NPV may be applied assuming zero for the first cash flow. Refer to
pages 59 through 63.
Example 1: You have just inherited $20,000 and wish to put some of it aside for
your daughter’s college education. You estimate that when she is of college age,
9 years from now, she will need $7,000 at the beginning of each year for 4 years
for college tuition and expenses. You wish to establish a fund which earns 6%
annually. How much do you need to deposit in the fund today to meet your
daughter’s educational expenses?
Keystrokes (RPN mode) Display
fCLEARH
0.00
7000?1
7,000.00
Down payment.
30?2
30.00
Life of mortgage.
12?3
12.00
Interest rate.
110?4
110.00
Property taxes.
65?5
65.00
Monthly expenses.
1200?6
1,200.00
Closing costs.
8?7
8.00
Resale costs (as a percentage).
400?8
400.00
Rent.
6.25?9
6.25
Savings interest rate.
30?.0
30.00
Tax bracket.
fCLEARG
30.00
Clear financial registers.
4n
4.00
Years in investment.
10¼
10.00
Yearly appreciation rate.
70000$
70,000.00
House price.
t
32,391.87
NCPR (calculated).
t
19.56
Yield.
t
21,533.79
Balance in savings.
