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FINM1416 Workshop 2 Assignment

The assignments in FINM1416 consist of two components; an individual component (50%) and a group component (50%). The individual component is due before the first workshop commences (Tuesday 12pm). The group component will commence during the Workshop (see timetable) where staff is there to help ensure you are on the right track.

Preparation

The purpose of this workshop assignment is to complete a buy vs rent analysis. Make sure you have completed Module 3 and 4, Tutorial 3 and 4, and Lecture 3, before attempting this assignment. Not doing this will likely cause confusion and extend the time you need to spend on this assignment.

Problem

Guangwu has just moved to Brisbane for his new job at UQ. He is considering to either rent or buy a place. Him and his partner both worked a few years prior and have each saved around $50,000. If they decide to buy, they will provide a down payment of $100,000. Any other initial expenses will be paid out of pocket by the couple.

The couple has looked around and has found an option that interests them.

A unit in the Brisbane suburbs. A 2-bedroom unit in Fairfield. This option is close to the place they work. There is a strict body-corporate that you need to ask permission for pets, major alterations, etc. However, there are already water saving devices installed and they are allowed to install solar on the roof of the unit, something they value greatly.

• Property cost: $550,000 (Offers over $530,000 they think they can get it for $550,000)

• Other costs when buying the property: Legal fees ($1500), deed transfer tax (@3% of property value), solar panels install ($5 000).

• Ongoing costs: Repairs and maintenance fees (+$60/month), Council fees (+$80/month), Sewage and water (+40/month), body corporate fees (+$200/month) . Compared to renting there is an estimated cost saving of $80/month, because of the roof-solar.

• Selling in 10 years: The couple expect to sell the unit for $600,000 in 10 years. They would pay off their loan at that time. You would also have to pay selling fees to your real estate agent (@4 .0% of the selling price).

• Benefits: close to work, close to their favourite YumChum restaurant, and are allowed to install solar on their roof.

Alternative: rent. If they do not buy this place, they will stay at a place they are temporarily renting now, which is a house a bit further out of Brisbane . They would use public transport most days for commuting, costing them $120 a month (includes water & sewage bills) . The rent is cheap for a 3-bedroom house, costing only $1600 in rent a month, and the landlord has promised not to increase it until they leave. The landlord pays for any repairs and maintenance costs.

Interest rates.

You have also identified two lenders (assume the current rates apply in the year 2028):

• Westpac (https://www.westpac.com.au/personal-banking/home-loans/fixed/).

• Bank Australia(https://www.bankaust.com.au/home-loans). Assume the unit home is eligible for the Clean Energy Home Loan 7 Star+, because of the solar panels and other items you will install, and the annual package fee can be divided by 12 to add to your monthly bank payment.

• Use a 30-year loan, use 3-year fixed rates (assume rates are compounded monthly if not specified), make monthly payments and do not use any premium/premier home loan packages (except if it is the Clean Energy loan package as mentioned prior). Assume that you can save at the same rate as you can borrow.

In preparation for your assessment, make sure you evaluate the buy and the rental options for both banks. Also, think about how you would decide what option you would choose based on financial factors and what non-financial factors you would consider in your final decision.

Part 1 – Individual Component (due 12 pm on Tuesday 5 April) (50% of mark)

Go to blackboard where you can find the “Workshop 2 – Buy vs Rent Template” . You should fill out all cells in yellow. Try to use as many formulas as possible (as demonstrated in the lecture). Guidance for certain cells (if not covered in lecture) are provided through comments in the file. When complete, fill out the Workshop 1 2 individual component (quiz) on

blackboard; this is what you will be bringing to start the discussion with your team during the workshop. It prompts you to answer the following questions:

Q1: What is the APR for Westpac? for Bank Australia? (provide the sources of where you found the rates, and the date the information was retrieved) .

Q2: What is the total monthly payment (property + bank) for the buy-option under the Westpac loan? Under the Bank Australia loan?

Q3: What is the PV of the buy option with Westpac? With Bank Australia? For the rent option?

Q4: Upload your filled out template. Here, also clearly state any assumptions made and why you made them for Q1-4.

Q5: List two non-financial criteria used in selecting a lender and two non-financial criteria when choosing between the buy and rent option. Explain the importance of the chosen criteria (explanation on non-financial criteria is below) (maximum of 3 sentences on each).

See the marking rubric posted on blackboard for a breakdown of marks.

Part 2 – Group component (2hr timetable + report due 12pm Tuesday 12 April) (50% of mark)

Similar to Workshop 1, you will be assigned to a group of around 4 students. The groups and discussion boards will be available when you start your online workshop. The discussion board is mostly used for file sharing, but can also be used for written communication for your group. You must attend the workshop to get marks for this component.

First 10min: Introduction to workshop, and instructions on where to find your discussion board threads. Your first task is to upload your answers to your groups’ thread. This is a crucial and necessary part of starting your group task.

Remaining workshop time: Review and discuss the different answers of your group members. Then, begin to brainstorm and write up the answers for your group report (up to 1000 words):

- Rank the options using solely financial criteria . Make sure you explain both the theory behind your ranking and provide the necessary computations (attach the completed excel file in a separate file)

- Where there any differences in answers to Q1-4? Where did they come from? How did you resolve them? (if no differences identified, list what was most challenging about this exercises and why)

- What are the most important non-financial factors that are considered by members of your team, for both lender and buy vs. rent, and why? Outline any differences you encountered and whether views have been influenced by other team members.

- Describe which option each member would choose, explain which criteria was most important in the decision, and if this has changed from their initial choice.

The non-financial criteria mentioned in the essay are to come from general knowledge. The idea is to acknowledge that money is not the only factor in making this type of decision. We are looking for how you think about decision making. There's no single correct answer – anything that would impact your decision is fine as long as you can reasonably argue that your selected criteria are relevant to the choice of a particular buy option or to rent, and it is non-financial.

See the marking rubric posted on blackboard for a breakdown of marks.

Marking

Your final score for the workshop will be computed out of 100 marks. Your best three workshops will individually count for 15% of your final grade. Marks will be allocated as follows: