Problem:

You have been transferred to a new city and you expect to be there for 3 years before being transferred again. You can rent a house for $2,100 a month. The property owner would be responsible for all property expenses, including property taxes and insurance. Alternatively, you can purchase a very similar house for $220,000. You could obtain an 80%, 10-year, interest-only mortgage at a 6% annual interest rate with monthly payments. In recent years property values in the area have been appreciating at 2% per year, and this rate is expected to continue for at least 3 years. Maintenance and repair costs are expected to average $1,500 per month and to increase at a rate of 3 percent per year. Property taxes are expected to be 2% of the property value each year. Selling costs are expected to be 6 percent of the house value at the time of sale (at EOY 3). Your marginal tax rate is 28%.

Question 1: If you require a 10% after-tax return on your equity, should you buy or rent based on 1) the IRR, and 2) the NPV?

Question 2: Explain your decision with each measure. Show the relevant cash flows for your calculations. Show your all work and please provide step by step solution.