Time Value of Money versus Rent Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Time Value of Money versus Rent Case Study Solution

Abstract

The case illustrates the deadlock for Rebecca, who has joined the investment bank after accomplishing her MBA degree to either buy a new condominium or should continue to live in her old condominium for $3000 a month. Since she is well aware of the concept of Time value of money, Rebecca determine to find the trade-offs and opportunity cost in acquiring the condominium through mortgage loan with 20% payment of interest or continuing to pay $3000 a month for her old condominium.

Keywords: Buy, Rent, Mortgage, loan

Time Value of Money versus Rent

Problem Statement

In the given scenario, should Rebecca buy the new condominium through mortgage or should she continue to pay rent. Both the decisions has to be made through determination of time value of money.

Analysis

Opportunity cost and payment

If Rebecca pursues to purchase the condominium, it would require her to pay the amount around $124,000 exclusive of taxes and other operational costs associated with transactions.However, if the same amount is invested in some other activity like bonds or something like that, it would give her the return of $406 monthly. But the option would require her to put down the interest of purchasing a new condominium.

Also, it is also analyzed that acquiring a new Condominium would incur the additional cost in future due to certain change in policies or political scenario of the country that might affect the interest and taxes rates. In such condition, Rebecca ha so pay an enormous amount of $ 1811, including condo Fees, Property taxes, Repair, opportunity cost and Maintenance.

Mortgage Acquisition

If Rebecca chooses to purchase the condominium at the cost of $ 600,000, at the rate of 4% annually. This will open a gateway for Rebecca to acquire the mortgage and buy the new condominium with the payment for next 25 years.Also, if Rebecca chooses to acquire the mortgage loan, it will incur her additional cost of $2533 monthly. Moreover, she also have to pay the down payment of 20% along with the Principal amount of $ 120,000.lastly, she also has to pay the closing fees property tax and monthly taxes, which will combine and make the amount of $1400 monthly.

Situational Analysis

There are four scenarios presented to Rebecca’s under certain conditions. (1) If the price of condominium remains unchanged than Rebecca will not incur any gain or loss however, if the price of the condominium increase by 10%, than Rebecca will gain $60000 with the market inflation rate of 2% for net 10 years that will offer a gross gain of $ 131397.But if the prices raise by 5% than she will get the gross profit of $377,366 as a return.

Discussion

The case represents multiple options available to Rebecca for utilizing her money according to time value of money. If Rebecca opts for purchasing the condominium, it will require her to pay the down payment, along with closing fees. However, if she continues to live in the rented condominium,she requires to pay the $ 3000 monthly only. But of se go to opt for option 1, which is acquiring the mortgage loan, she would have to pay the amount of $ 4345 including all taxes and additional cost, which is higher amount than the one she is paying in the form of rent.

But it is also important to analyze that rent is also a form of liability that will not transfer the ownership to Rebecca name, and it will not give her anything in had t the day end. Which will give rise to the concept of time value of money. Though acquiring the mortgage loan will require Rebeca to pay an additional amount, but at the day end, the will get the ownership of the condominium, which is the effective utilization of money. Though acquiring loan and rent are both liability, but one labiality offers the ownership at the day end which is termed as limited liability. Also, if she invests in any other activity, it will give her the return of $ 406 that will only offset the inflation cost for her in return n future, thus not offering any ample amount of opportunity to Rebecca.

However, acquiring the loan would not be easy in terms of payment since one payment requires her to pay a high amount inclusive of principal payment and transaction fees. But it is an opportunity, since there are chances that the price ofland will increase in future, and that of the financial position of Rebecca in next 10 years, that will ease up the payments nada so offer a valuable asset in return.

Time value of Money versus Rent Decision Harvard Case Solution & Analysis

Recommendation and Conclusion

The option of acquiring the mortgage loan is best for Rebecca, as it will offer her the ownership of the land at the day end in the next 25 years. Though the option is costlier in present time, yet it will offer her great returns in future. Since rent is an unlimited liability, so even if Rebecca lives for 50 years in the rented house, it will not offer her anything in return, making the money go is vain. Also, if she invests in other investment activities, the return will not trade off with the future results of acquiring an ownership of land.And since it is also depicted that the price of land will appreciate, it is right time for Rebecca to acquire the mortgage and the ownership of land in next 25 years............................

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