W6_Mohammed_When should i start building my house

Problem definition

I have a land in Khartoum, Sudan and I’m planning to proceed with building this land, here im exploring when I can proceed with building considering my savings and inflation rate and the rental fees. The rental fee was requested by the CfH as to be included in this analysis as to arrive to the best decision.

Development of the feasible alternatives

The possible options for starting of the construction could be listed as follows:

1. End of 2012

2. End of 2013

3. End of 2014

Develop the outcomes for each alternative

As per the recent Sudan economical situation by the Sudanese central bank, one US Dollars (USD) equal to 5.5 Sudanese Pound (SDG). My roughly estimation for construction one story house is not less than 65,000USD, Here is the evaluation of my possible choices to start the construction of my house considering my possible savings in the beginning of the construction and then the balance could be through bank installments (bank financing is not considered in this analysis, since the duration for construction is equal among the given alternatives), the plan could be started in one of the below options:

1. End of 2012 considering the savings and the renting expenses

2. End of 2013 considering the savings and the renting expenses

3. End of 2014 considering the savings and the renting expenses

Accepted Criteria

Using the present and future equivalent values of single cash flows, the option which will give the best economical indicators (lowest cost) will be selected as the best option.

Analysis and comparison of the alternatives

Considering that the construction will take around 6 months to one year as an average, the above three options have been evaluated according to the following factors:

-My savings:

1. By end of 2012 ------- I may start with 100,000SDG = 16,700USD

2. By end of 2013 ------- I may start with 180,000SDG = 30,000USD

3. By end of 2014 ------- I may start with 300,000SDG = 50,000USD

-Inflation trends in Sudan based on the central bank of Sudan records which given as 16% by 2011 and 38% by the 2012 and based in the nongovernmental sources it’s expected to decrease to 30% by the 2013 and 20% by 2014 since the economy will recover due to the increasing gold mining and expected new hydrocarbons exploration.

Selection of the preferred alternatives

Considering the time value of money and the inflation rate in Sudan from the central bank of Sudan, by using the relating present and future equivalent values of single cash flows, as follows:

F = P (1+i)ᴺ

Given that:

F:         Future single sum

P:         Present Value

i :         Inflation or interest rate

N:        Period, Years

Solution

Back to the above options:

P: The nowadays estimation of 65,000USD is needed to complete one story building

i: an average of 16% as per the Central Bank of Sudan records

1. End of 2012:

F = P (1+i) ᴺ

   = 65,000 (1+0.38)¹

   = $89,700

-Expenses of renting: Dec 2012 to May 2013 = Renting fees X 6 Months = 1100 X 6 = 6600 SDG = 1100 USD, therefore the total expenses for option one = 89,700 + 1,100 = 90,800 USD

-Considering that I’m planning to save $16,700 by end of 2012 then the difference is going to be $74,100

2. End of 2013:

F = P (1+i) ᴺ =

                           = 65,000 (1+0.30)²

                           = $109,850

-Expenses of renting: Dec 2012 to May 2014 = Renting fees (+10% annual increment) X 18 Months = 1,210 X 18 = 21,780 SDG = 3,630 USD, therefore the total expenses for option one = 109,850 + 3,630 = 113,480 USD

-Considering that I’m planning to save $30,000 by end of 2013 then the difference is going to be $83,480

3. End of 2014:

F = P (1+i) ᴺ =

                           = 65,000 (1+0.20)³

                           = $112,320

-Expenses of renting: Dec 2012 – May 2015 = Renting fees X 6 Months = 1,331 X 30 = 39,930 SDG = 6,655 USD, therefore the total expenses for option one = 112,320 + 6,655 = 118,975 USD

-Considering that I’m planning to save $50,000 by end of 2014 then the difference is going to be $68,975

Selection of the preferred alternatives

As per the above analysis which using the present and future equivalent model with consideration of renting cost over the years of the given options, Option 3 (start the construction by End of 2014) was giving the best results (lowest price comparing to the other portions costs). Therefore option three will be considered.

Performance monitoring and the post evaluation of results

The inflation rate together with my overall savings should be followed closely as to refine those results prior to start immediately with the given option.

Conclusion

Applying the present and future equivalent values of single cash flows, the best option given is the third option, which to start my house building by end of 2014, however the selected option is subjected to the overall Sudanese economy and my possible savings.

References

* Engineering Economics-Fifteen Edition, chapter 4, Relating Present and Future Equivalent Values of Single Cash Flows, page113

* Website of the Central Bank of Sudan: www.CBOS.gov.sd

* Central Bank of Sudan, Public Information Note (July 2012).