A Student's Dilemma: Rent or Buy Case Solution
Quantitative Analysis
As we can see that the NPV of both the rent options is negative, and the NPV of both buy options are positive, it means that in rent option; Scott will only pay and there would not be any inflow or profit, but in buy option; she can earn a profit on her investment.
If she wants to choose to rent and not buy; the rent non-inclusive option will be better.On the other hand; if she wants to buy not rent; then buy-inclusive option will be better, because the NPV of the buy-inclusive option is greater than the buy non-inclusive option.
Options |
NPV |
Rent-inclusive |
($18,426.13) |
Rent- Non inclusive |
($16,971.44) |
Buy-inclusive |
$14,172.63 |
Buy- Non inclusive |
$9714.53 |
Sensitivity Analysis
We performed a sensitivity analysis based on the four parameters which are given below in the table, to see the impact of these parameters on NPV, if they deviate from the initial assumptions.
| Parameter | Initial Assumption | Worst Case | Best Case |
| Housing Price | 2% Appreciation | 0% Appreciation | 5% Appreciation |
| Monthly Rental | $475 | $435 | $510 |
| Maintenance | $6000 for 3 years | $10,000 for 3 years | $4000 for 3 years |
| Mortgage Interest Rate | 3.95% | 5% | 3% |
In the worst case scenario; the house appreciates by 0% instead of 2%, so in that case; the NPV will be $5,467.27.And, if the monthly rent is charged at $435 instead of $475; the NPV will be $8,495.77 instead of $14,172.63. If the maintenance is $10,000 in the worst case; the NPV will be $10,230.37, and if the mortgage rate increases to 5%, then the NPV will be $10,135.56. The same happens when we change each parameter which that affects the NPV in base; we will then have change in the NPV. NPV is more sensitive to the house pricing appreciation rate and least sensitive to the maintenance cost.
| NPV | Initial Assumption | Worst Case | Best Case |
| Housing Price | $14,172.63 | $5,467.27 | $27,556.41 |
| Monthly Rental | $14,172.63 | $8,495.77 | $19,139.88 |
| Maintenance | $14,172.63 | $10,230.37 | $16,143.76 |
| Mortgage Interest Rate | $14,172.63 | $10,135.56 | $17,623.48 |
Risk factors and other considerations
There are so many risk factors that must be considered before buying a house. The risk factors can be house pricing depreciation, as an increase in the mortgage rate more than what we assumed in the worst-case scenario, could cause problems while selling the house after 3 years due to the economic downsize, etc. Christine Scott would be able to handle all these work, if she works properly by making an applicable plan.
Conclusion:
We would recommend Christine Scott to buy the house and rent it to four other friends with inclusive option. If Scott will earn profit which is equal to the NPV of $14,172.63.While performing the sensitivity analysis; we have come to the conclusion that in even the worst scenario; the NPV will be positive and above $5000, and even the base case scenario can give the highest NPV of $27,556.41. It shows that in any case, buying an inclusive option will provide a positive NPV................................
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