Scribd Logo
Upload

Welcome to Scribd!

  • 53 views

    Engineering Economics Case Study

    Uploaded by

    Azkha Avicena
    This case study examines four plans (A, B, C, D) for financing the purchase of a $150,000 home. The plans vary in terms of mortgage type (fixed vs adjustable rates), loan length (15 vs 30 years), and down payment amounts. The goal is to select the plan with the most money remaining after 10 years. Plan A is a 30-year fixed 10% mortgage with 5% down. Plan B is a 30-year adjustable rate mortgage starting at 9% for 3 years then increasing, with 5% down. Plan C is a 15-year fixed 91⁄2% mortgage with 5% down. Plan D is owner financing at 81⁄2% for 10 years with a balloon payment

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Engineering Economics Case Study

    Uploaded by

    Azkha Avicena
    53 views2 pages
    This case study examines four plans (A, B, C, D) for financing the purchase of a $150,000 home. The plans vary in terms of mortgage type (fixed vs adjustable rates), loan length (15 vs 30 years), and down payment amounts. The goal is to select the plan with the most money remaining after 10 years. Plan A is a 30-year fixed 10% mortgage with 5% down. Plan B is a 30-year adjustable rate mortgage starting at 9% for 3 years then increasing, with 5% down. Plan C is a 15-year fixed 91⁄2% mortgage with 5% down. Plan D is owner financing at 81⁄2% for 10 years with a balloon payment

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This case study examines four plans (A, B, C, D) for financing the purchase of a $150,000 home. The plans vary in terms of mortgage type (fixed vs adjustable rates), loan length (15 vs 30 years), and down payment amounts. The goal is to select the plan with the most money remaining after 10 years. Plan A is a 30-year fixed 10% mortgage with 5% down. Plan B is a 30-year adjustable rate mortgage starting at 9% for 3 years then increasing, with 5% down. Plan C is a 15-year fixed 91⁄2% mortgage with 5% down. Plan D is owner financing at 81⁄2% for 10 years with a balloon payment

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    53 views2 pages

    Engineering Economics Case Study

    Uploaded by

    Azkha Avicena
    This case study examines four plans (A, B, C, D) for financing the purchase of a $150,000 home. The plans vary in terms of mortgage type (fixed vs adjustable rates), loan length (15 vs 30 years), and down payment amounts. The goal is to select the plan with the most money remaining after 10 years. Plan A is a 30-year fixed 10% mortgage with 5% down. Plan B is a 30-year adjustable rate mortgage starting at 9% for 3 years then increasing, with 5% down. Plan C is a 15-year fixed 91⁄2% mortgage with 5% down. Plan D is owner financing at 81⁄2% for 10 years with a balloon payment

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 2

    ENGE 600011 Engineering Economy Case Study

    2021/2022 Odd Semester Due Date: 15/12/21

    “Financing Your Dream House”

    Problem Statement:
    Purchasing a house is probably the largest single financial commitment the average person will ever
    make. Undoubtedly, when a person or a couple decides to purchase a house, one of the most
    important considerations is the financing. There are many methods of financing the purchase of
    residential property, each having advantages which makes it the method of choice under a given set
    of circumstances. The selection of one method from several for a given set of conditions is the topic
    of this case study. Four methods of financing, identified as plans A, B, and C, are evaluated.
    The major criterion used here is: Select the financing plan which has the largest amount of money
    remaining at the end of a 10-year period.

    The following is a description of the four plans:


    Plan Description
    A 30-year fixed rate of 10% per year interest, 5% down payment
    B 30-year adjustable-rate mortgage (ARM*), 9% first 3 years, 9½% in year 4, 10¼% in
    years 5 through 10 (assumed), 5% down payment
    C 15-year fixed rate of 9½% per year interest, 5% down payment
    D Owner financing at 8½% per year, $20,000 down payment, with
    a balloon payment in year 10.

    Other information:
    ❑ Price of the house is $150,000.
    ❑ House will be sold in 10 years for $170,000 (net proceeds after selling expenses).
    ❑ Taxes and insurance (T&I) are $300 per month.
    ❑ Amount available: maximum of $40,000 for down payment, $1,600 per month, including
    T&I.
    ❑ New loan expenses: origination fee of 1%, appraisal fee $300, survey fee $200, attorney’s
    fee $200, processing fee $350; escrow fees $150, other costs $300.
    ❑ Any money not spent on the down payment or monthly payments will earn tax-free interest
    at ¼% per month.

    *
    Adjustable rate mortgages are tied to some index such as U.S. Treasury bonds.
    Case Study Exercises:
    1) Answer the following questions:
    a) Evaluate plans A, B, C, and D based on the economic criterion described earlier and select
    the best financing method.
    b) Construct an amortization schedule for each of the plans.
    c) What is the total amount of interest paid in plan A through the 10-year period?
    d) What is the total amount of interest paid in plan B through year 4?
    e) What is the maximum amount of money available for down payment under plan A, if
    $40,000 is the total amount available?
    f) By how much does the payment increase in plan A for each 1% increase in interest rate?
    g) If you want to “buy down” the interest rate from 10% to 9% in plan A, how much extra
    down payment would you have to make?
    2) Use all the methods of economic analysis that you have learned so far (e.g., PWA, ACFA,
    RORA) to select the best financing method. If needed, make any necessary assumptions to solve
    this part.

    Instructions:
    ❑ This case study is to be completed in groups of four or five students.

    ❑ The solution to this case study should be performed mainly using Microsoft Excel.
    ❑ As part of your analysis, results, and conclusions, you are asked to provide a table that
    summarizes your final answers and recommendations. You should clearly explain your
    reasoning and state your assumptions, if any.
    ❑ Each group is required to submit only one Word file, one Excel file and one presentation file
    (ppt) by the end of the day (11:59PM) on Wednesday, 15/12/21. Printouts of Excel output
    should be summarized and included in the final report, as appropriate. Please provide a
    cover page for your report. The work presented in the Excel file should be professionally
    organized in a format that can be easily understood (i.e., self-explanatory!).
    ❑ The Word / Excel / Ppt files should be named as follows:
    TeamX_Student1_Student2_Student3_Student4, without any spaces. For example, if
    Muhammad Emir, Muhammad Fadhli, Muhammad Furqan and Muhammad Kelvin are
    working in a group, their file would be named:
    Team1_MEmir_MFadhli_MFurqan_MKelvin.doc. (xls, ppt). Failure to follow these
    instructions will result in a reduction in the group’s overall grade in this assignment.

    You might also like