team1-project presentation
TRANSCRIPT
DEPARTMENT OF MANUFACTURING SYSTEMS ENGINEERING AND MANAGEMENT
ENGINEERING ECONOMICSMSE604
FALL 2015 TEAM
Almofawez LatifahAlrwishid Abeer
Jha AshishNaik GautamiRaisoni Akash
THE SMITHSON’S MORTGAGE
MORTGAGE 1: 30 year fixed rate at 7.58%/year/month, monthly payments, minimum 5% down payment, and one-point closing costs
MORTGAGE 2:15 year fixed rate at 7.13%/year/month, monthly payments, minimum 5% down payment, and one-point closing costs
FOUR OPTIONS
MORTGAGE 3: 30 year fixed rate at 7.08%/year/2-weeks, bi-weekly payments, minimum 5% down payment, and one-point closing costs
MORTGAGE 4:15 year fixed rate at 6.63%/year/2-weeks, bi-weekly payments, minimum 5% down payment, and one-point closing costs
Assuming one point closing cost as x= (103,000-10,000) + 0.01*x = $94,000 (Round Off)
A down payment of $10,000 is made.
ASSUMPTIONS
To find the best mortgage option from the options given. To determine the effects of mortgage plan choice to retirement savings account.
OBJECTIVE
Examining all our mortgages for calculating the total mutual fund savings.Based on the highest savings amount, we decided our mortgage option.
SOLUTION METHODOLOGY
Data given: 30 year fixed rate @ 7.58%/yr. /mo., monthly payments, minimum 5% down payment, 1 point closing costs.
Examining Mortgage 1
House cost $ 103,000
i 0.632%Effective income tax rate
0.0235
Total Mortgage cost
$ 238,452
Monthly Mortgage cost
$ 662.36
Monthly saving(Retirement plan)
$ 337.63
FV Tax saving for 30 years
$ 21,568.17
Calculating the Future worth would give us the value of amount in mutual fund saving for 30 yearsFW (0.75%) = 21568.17 + 337.63(F/A, 0.75%, 360)
= 21568.17 + 337.63(1830.7434)
= 639,682.0922
Calculating Future Worth
Calculating the Future worth of Mutual fund saving account for year 30 – 35
As there is no mortgage payment after 30 years the complete $1000 go in the mutual fund saving account.
FW (0.75%) = 639,682.0922(F/P, 0.75%, 60) + 1000(F/A, 0.75%, 60)
= 639,682.0922(1.5657) + 1000(75.4241)
= 1,076,974.352The total mutual fund saving after the 35 years = $1,076,974.352
Future Worth
Total mutual fund saving after the 35 years
MORTGAGE 1 $1,076,974.352
MORTGAGE 2 $1,025,813.886
MORTGAGE 3 $1,157,569.857
MORTGAGE 4 $1,079,980.183
From the calculations, we have found that the retirement savings are maximized I we select Mortgage 3.
Therefore mortgage 3 is a good option.
CONCLUSIONS
After calculations, we choose the MORTGAGE 3 option.
Next better option after Mortgage 3 was MORTGAGE 1.
SENSITIVITY ANALYSIS
TO MINIMIZE THE AMOUNT OF INTEREST PAID.
ACCORDING TO CALCULATIONS, INTEREST PAID IS MINIMUM IF THEY CHOOSE MORTGAGE 4 AS OPTION, SO PERFORMING SENSITIVITY ANALYSIS ON MORTGAGE 4.
2nd OBJECTIVE
Adding 2% on interest of Mortgage 4Total interest Paid= 55689.68
Adding 5% on interest of Mortgage 4Total interest Paid=57645
Sensitivity Calculations
Adding 7% on interest of Mortgage 4Total interest Paid=58627.87
Adding 8% on interest of Mortgage 4Total interest Paid=59367.21
Breakeven occurs at 8% and now “Mortgage 2” becomes our best option.
FINAL CONCLUSION