Question

Viola has to relocate for her job. She finds a townhome with an option to rent or buy. The conditions of each are shown below. Rent: Move-in costs of $2,380 and monthly payment of $845. Buy: Move-in costs of $5,260 and monthly payment of $785. Viola moves frequently due to her job, but she thinks that she will stay in the area for 4 years. Therefore, she decided to buy. Choose the best evaluation of Viola’s decision. a. Since the costs would be the same over the 4 year period, she will have made a good decision if the property value does not decrease. b. She made a fairly good decision. Buying the townhome will be cheaper over the 4 year period as long as she doesn’t have major repairs to make. c. She made a poor decision if the property value does not increase. Renting the townhome would be cheaper over the 4 year period. d. There is not enough information given to determine which option is best.

Answer 1

D. There is not enough information given to determine which option is best.

Explanation:

We have the two cases as below:

1. Renting the town-home.

Now, the move-in costs of the home = $2,380

Monthly payment = $845

Since, she stays for 4 years i.e. 4×12 = 48 months

Thus, total monthly payment = 48 × monthly payment = 48 × $845 = $40,560

So, total payment of the home = move-in cost + total monthly payment

i.e. total payment = $2,380 + $40,560 = $42,940.

2. Buying the town-home.

The move-in costs of the home = $5,260

Monthly payment = $785

Since, she stays for 4 years i.e. 4×12 = 48 months

Thus, total monthly payment = 48 × monthly payment = 48 × $785 = $37,680

So, total payment of the home = move-in cost + total monthly payment

i.e. total payment = $5,260 + $37,680 = $42,940.

Since, the total payment for both the options is same. It is not enough to determine which option is the best for her.

Hence, option D is correct.

Answer 2

D. There is not enough information given to determine which option is best.

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Other choices hint at the sort of information that is needed: expected resale value, expected costs of repairs, likely other costs such as utilities and taxes.