Financial Management FNCE90060 – ?One of most common and significant financial decisions people… 1 answer below »

Assignment 1
Financial Management FNCE90060
Semester 2, 2019
This assignment is due by 8 pm Friday 30 August 2019 via the Assignment 1 Turnitin
submission link on the LMS. Late assignments will have marks deducted at my discretion. The
system will only accept PDF documents. You should type up your answers in a program like
Word, then output/print to PDF. If your computer is not set up to make PDFs, search the web
for CutePDF, which allows you to create them from any program. Additionally, you should
submit your Excel file via the Assignment Tool in the LMS.
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Please write clearly and concisely. Unnecessarily long, meandering answers will be marked
down. Along these lines, you will want to proofread your submission, as unclear answers will
be penalised. You will not, however, be evaluated on visual presentation. A simple, typed
document will be good enough.
Answers without (mathematical) justification will not receive any credit. In particular, you
should clearly indicate what formulae were used for each answer.
One of most common and significant financial decisions people make is whether to buy or to
rent a home. In Melbourne, a family-sized home in a suburb within 20km of the CBD costs
roughly $1 million. The maintenance costs are approximately $6,000 per year, growing by 2%
per annum. By comparison, the annual rent for a similar home is approximately $36,000.
To purchase, a buyer needs to pay a 20% down payment on the purchase price, as well as a
stamp duty (tax) of 5.5% payable to the state government. Loans are currently available at
about 3.5% interest per annum per on 30-year loans.
Suppose the buyer will sell the house in 10 years. They must pay 30% capital gains tax after
the sale of the house. The tax is calculated as 30% * (sale price in ten years minus original $1m
sale price). If sold at a loss, the capital gains tax is negative, meaning the buyer receives a tax
credit for that amount.
For simplicity, we’ll make the following assumptions:
1. The buyer pays cash for the down payment and stamp duty and borrows the remaining
80% of the purchase price.
2. Other than the down payment and stamp duty, all cash flows occur lump-sum at the end
of the year. This means that a) we’ll estimate loan repayments assuming 30 annual
payments are made, the first starting in one year; and b) the first year’s maintenance or
rent will similarly be due in one year.


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