W4_HYCIENTH_Investment Decision: Buy vs. Build A House

1.  Problem Recognition, Definition and Evaluation

I have inherited a large sum of money from Aunty Bee. I think the purchase of a beach house would be a good investment. Besides a good investment, I could enjoy the house with my family for many years to come. I live 150 miles from the ocean, and there are several communities that would be excellent candidates for my purchase (or build a new house). Which option would be best? [Engineering Economy, Problem 14-3]

2.  Development of Feasible Alternatives

Two major investment decisions are involved here; buy a house or build a new house. In buying a house, the following considerations need to be taken into account:

a. Cost of designing/engineering the building

b. Type of building - (assume a 4 bedroom apartment)

C. Location of the proposed building – what town will the building be sited? (For this case study, we will assume 4 possible locations in Nigeria: Warri, Port Harcourt, Lagos and Abuja)

d. Government building regulations and zoning laws

e. Cost of Building (location dependent; - materials, cost of living, transportation, building permit, etc.).

f. Cost of maintenance – calculated as recurrent expenditures per annum over building lifespan.

g. CBD Factors – Central Bidding District Factors published by the CCPI – Composite Consumer Price Index for Building Developers for property lease or sales. (Assume CBD for Abuja = 1, Lagos = 0.8, Port Harcourt = 0.6, Warri = 0.4)

h. Payback period/NPV Analysis for Investment Decisions. Payback period = construction cost/ rent per annum.

i. Accessibility/proximity to potential customers (Bankers, Industrialists, Civil service-teachers, etc.)

3.  Development of the outcomes for each alternative

 Assume cost of building a 4 bedroom apartment in Warri = N 4.5m

Building life span = 60 years

Location of Building	CBD Factor	Construction cost [(4.5m/ 0.4)x CBD Factor] = C             (in million Naira)	Cost of Design [25 % of Construction cost] =D (in million Naira)	Total Cost of Building [C + D] (in million Naira)	Recurrent expenditures per annum, RE (in thousand Naira)	Cost of maintenance (RE X 60yrs)
Warri	0.4	4.5m	1.13m	5.63m	50	3.0m
Port Harcourt	0.6	6.75m	1.69m	8.44m	100	6.0m
Lagos	0.8	9.00m	2.25m	11.25m	75	4.5m
Abuja	1	11.25m	2.81m	14.06m	150	9.0m

4.  Selection of a Criteria

The best location for the 4 bedroom apartment building will be that which meet the following criteria:

1. Least Life cycle cost (total cost of building + cost of maintenance).

2. Location that the highest rent can be collected in the event that the family decides not occupy the building. OR, the location with the least payback period.

5.  Analysis and Comparison

Applying the Compensatory Model and converting the above attributes to non-dimensional scaling form results in:

6.  Selection of the Preferred Alternative

From the analysis above, the best location to build a beach house is Port Harcourt.

7.  Performance Monitoring & Post Evaluation of Results

Warri having the least life cycle seemed to be best place to site a beach house. However, with Warri attracting the least rent, even Lagos proved to be a better location than Warri for a development of this nature.

While Port Harcourt has the second lowest life cycle cost, next to Warri, it attracted the highest rent, making it the most profitable place to site a beach house.

8.  Bibliography:

1.     Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2012). Engineering Economy (15th ed.), Chapter 14, New Jersey, NJ. Pearson Higher Education, Inc.

2.     Delaware Management Holdings, Inc, (2012) Real estate and inflation: We would rather be owners. Retrieved from: http://www.delawareinvestments.com/co/delaware/institutional/real-estate-and-inflation

3.     Tate, K., & Stackpole, C. (2006).The Advanced Project Management Memory Jogger^TM.