Engineering Economics Case Study
Many people dream of buying a home. However, how does one decide on purchasing a home? Why do some people prefer to rent than to buy? The decision to either buy or rent a home is usually based on the individual on economic and non-economic factors. Yet, it is hard to categorize the individual’s decision solely based on those two factors. One crucial factor is mobility, and it can be hindered through homeownership. Owning a home also involves its risks, such as a high mortgage loan and economic recessions. The factor of pride of ownership of a home is purely subjective, and it varies with different people.
In this case study, we will look at whether Hassan and his wife will decide to buy or rent a house for ten years. We will compare the net value of the following plans for in 10 years:
- Buy
- Plan A: 30 years at a 5.25% interest per year
- Plan B: 15 years at a 5% interest per year
- Rent
The price of the house = 1.2 million AED.
The couple’s monthly allowance = 11,000 AED
The initial amount at hand (Po) = 150,000 AED at an interest of 0.5% per month
T & I per month = 2,000 AED
Value of the house after 10 years = 1.32 million AED
- The method used to analyze and choose the choice is the future worth method. This method will calculate the net worth of buying a house and renting.
- Future value is considered as the value of the current asset, the house, at a date in the future, in this case in 10 years, based on an assumed growth. It is essential to an investor, in this case, Hassan and his wife, since they will use it in estimating how much the investment that they will make will be worth in 10 years to come. Knowing the future value of their investment will allow them to make a sound investment.
PLAN A
Interest per month = 5.25/12 = 0.4375%
Down payment = 10% of price = (0.1*1,200,000) = 120,000 AED
Amount left (L)
Future value of amount left (F1)
Monthly installments over 30 years (A)
Total monthly payment
Money left from monthly allowance
Future value of money left over from monthly allowance (F2)
The loan balance after 10 years(FL) = Loan value of 10 years- Value of all the payments made in 10 years
Therefore, net value at the end of 10 years
PLAN B
Amount left (L)
Future value of amount left (F1)
Monthly installments over 15 years (A)
Total monthly payment
Money left from monthly allowance
Future value of money left over from monthly allowance (F2)
The loan balance after 10 years (FL) = Loan value of 10 years- Value of all the payments made in 10 years
Therefore, net value at the end of 10 years
RENT
Rent paid per month = 10,000 AED
Po = 150,000 AED at an interest of 0.5% per month
Monthly allowance = 11,000 AED
Money left from the allowance after paying rent = 11,000-10,000 = 1,000 AED
Value of the money saved = Future value of Po + Value of the savings over 10 years
CONCLUSION
From the three plans analyzed, it can be seen that plan B is the best alternative since it has the highest future value. The worst option is the couple to rent for the time since it has the lowest amount of money saved over the ten years. The calculation of the future growth was based on the assumption that over the ten years, there will be a steady growth and that the economy will not fluctuate to keep the interest rates stable. It also didn’t into account the non-economic factors that vary from investor to investor and which cannot be genuinely factored in. It has, therefore, been determined from the analysis that Hassan and his wife should invest in buying a home rather than renting one. In the long run, the investment will be of higher value than it is when they buy it—renting means that they will save far less money than they would if they had decided to invest in buying a home.
References
Ayyub, B. M. (2014). Risk analysis in engineering and economics. CRC Press.
Blank, L. (2005).Engineering Economy, 6th Ed., McGraw Hill, Avenue of the Americas, NY., 2005.
Sasmita, M. (2010). Engineering economics and costing. PHI Learning Pvt. Ltd.
Whitman, D. L., & Terry, R. E. (2012). Fundamentals of engineering economics and decision analysis. Synthesis Lectures on Engineering, 7(1), 1-219.