Question

The apartment was owned and had been promoted by a state-owned construction company and was offering two alternatives:

Option A: renting the apartment with a perpetual contract, meaning forever. The Marconi family thought that could be a good solution for them.

The family was very happy living in that area, and they had the chance to live there forever at an offered price of 1.600€ the first month, and the rent price will be growing by a 0.1% monthly.

At the same time, they were not forced to ask for a loan, which represented a heavy burden of the Marconi’s.

Option B: consisted of acquiring the property with a mortgage scheme for 40 years. The total price of the apartment is 800.000€. The family can pay an initial down payment of 200.000€ and the rest (600k€) to be paid in constant monthly payments with an annual interest rate of 2.4% compounded monthly.

Mrs. Marconi establishes the maximum amount they can pay monthly as 2.000€.

1. 1) In case of taking option A, what is the amount of the monthly payment the Marconi family should pay for 40 years? (only the amount to be paid that month) Show the calculations and explain why. (10 points)

Answer 1

The first month rent amout= 1.600

the growth rate = .1%

next month rent = 1.600*.1%=1.6016((only the amount to be paid that month)

Perpetuity in the financial system is a situation where a stream of cash flow payments continues indefinitely or is an annuity that has no end. In valuation analysis, perpetuities are used to find the present value of a company’s future projected cash flow stream and the company’s terminal value. Essentially, a perpetuity is a series of cash flows that keep paying out forever.An annuity is a stream of cash flows. A perpetuity is a type of annuity that lasts forever, into perpetuity. The stream of cash flows continues for an infinite amount of time. In finance, a person uses the perpetuity calculation in valuation methodologies to find the present value of a company's cash flows when discounted back at a certain rate.