Buy or Rent: Living in Singapore Case Study Solution
Buy or Rent: Living in Singapore Case Study Solution
PV of Cash Flows
The detailed present value analysis of the cash flows has been performed by considering the facts and figures stated above. The present value of cash flow helps in identifying the present time value of the cash flows expectation for future. In thispresent value analysis;the cash flows incurring at the time of purchase of building did not indicate any change in its value because there wasn’tany time effect, but the present value that was expected for future cash flows after 2010 did indicate the possibility of change due to the increase in the value of currency with the passage of time. Appendix 3 shows the present value of all cash flowsexpected to be incurred throughout a ten years’ time period by considering different scenarios.The present values have been calculated by assuming 10% discount rate. The present values of all cash flows show a decreasing trend,because of time value of money.(JH Stock, DA Wise , 1999)
Scenario #1
In the first scenario; all the cash flows including rent as opportunity costare taken for calculating the present value. The initial cash flows are considered to be outgoing cash flow with no time effect. Also, differential cash flows including installment payments and different fees have been taken with respect to ten years’ time period as outgoing expense for considering the time value on annual basis. The monthly rent payment of 4000 is considered to be an opportunity cost with respect to PV annuity effect because this amountwas decided to be used for paying the monthly installments for the condominium.Moreover, in the ten years’ time period;the sales value of the property would remain same as 1500,000, and 1% agent fee would be paid along with the payment of the remaining loan’s principal amount.
The present value analysis (0f 2010) indicates positive outcomes for purchasing the property in 2016, because of the expected decrease in the property value in 2016. By considering the time value of money, Wong wouldget an amount of $77,412 as a gain,after the period of ten years period from the sale ofthe purchased property.
Scenario #2
In the second scenario, all the considerations will remain same except the property’sprice which would increase by 10% at the time when it would be sold. The present value in this case, shows an increasedpresent value of $134,666as gainbecause of the increased selling price with the passage of time.
Scenario #3
The third scenario represents some major changes in rent and the selling price of the property. The scenario suggests a 0.15% increase in rent along with selling price. The present value analysis shows a slightly increased trend, indicatingthe amount of $88160 as a total gain from the saleof the property.
Scenario #4
The fourth scenario suggests an annual increase of 0.5% in the mortgage rate on a constant basis throughout the period of ten years. It provides $109,878 as gain from the property’s sale,because of the increase in the interest rate, which would ultimately decrease the annual interest payments,if we keep the value of currency with the passage of time under consideration.
To shorten up, all the scenarios indicate positive gain from sale of the purchased property after ten years’ period. But in comparison to other scenarios, the second scenarios provides with the massive increase in gain because of the increase in the value of the properties caused by the increase in the value of currency with the time passage.Wong should sale the property when the Singaporean real estate market would an increasing trend in prices of properties..
Differential Cash Flows
Differential cash flows are the cash flows that incur additionally because of the ongoing operations. The individuals must pay these cash flows just to maintain the smooth running of the operations (purchasing activity). Mr. Wong has to pay these cash flows in order to be eligible for living in the house as ownerin the near future without any interruptions from government or legal authorities that could hinder the chances of Mr Wong to become an owner. In this property purchase project, Mr. Wong would have to pay differential cash flows in the form of maintenance fee of $250, property tax of $100, and the repair and general maintenance expenses of $100, on the monthly basis. Appendix 4 shows differential cash flows for purchasing a property in Singapore which is a total sum of $450, which is to be paid on monthly basis as installments.
Recommendations
After analyzing the situation thoroughly; the transaction from both qualitative and quantitative aspects and the concernsof Mr.Wong regarding the future sale of a condominium; following recommendations are presented:
For taking a rationale decision all the given scenarios have been analyzed.In the first scenario the selling price of the unit is estimated to remain unchanged after the 10 years’ period, which means that the future value of the condominium will be $1.5 million, with an assumed discounted rate of 10%. Mr. Wong would get the present value of $77,412 and he is saving the rent of $4000 as installment amount. In the second scenario; the condominium is estimated to be sold at $1,650,000, whichindicates an increase of 10% in the selling price, while all the other calculations or values will remain unchanged.Wongwould get the present value of $134,666. In the third scenario, the selling price of the unit at the end of 10 years would be $1,527,000 with an increase of 0.15% per month, and the savings from changing the rental cost into installments is estimated to $4006 per month, while the present value of the unit would be $5, 88,725. The last scenario says that the future value will remain the same as $1.5 million, while the mortgage interest rate would increase by 0.5% annually on a constant basiswhich gives the present value of $109,878. All the scenarios are indicating positive present values, but the second scenario is more favorable for investment perspective as the sales price are indicated to be increasing, which would be beneficial for Wong family,because purchasing a condominium is a huge investment and purchasing a condominium near famous schools costs more. Mr. Wong should consider the new executive condominiums which would be available from May 2016 as by the June of 2016; the prices would deceasing by 9.4%.
After a detailed present value analysis; Mr. Wong can be recommended to acquirethe property when the real estate’s value decreases, resulting in the decrease of propertyprices. But the present value analysis indicates that the future value of property could be decreased after a short interval of time,and if we consider the qualitative measures, thentheyrepresent that acquiring a property in an already established residential area is a great opportunity. It is said to be the great investment opportunity because of the fact that the value of the real estate and the prices of the properties would increase with the passage of time. Hence, it could be concluded thatthe purchase of property when the property prices are low, would lead tohave benefit from the increasein the property priceinthe near future, which would multiply the value of the purchased property in the future…………..
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