Time Value of Money: A Home Investment Decision Dilemma
(3 pages of text)
In early 2016, Naresh Jain was busy looking at various rental properties on popular real estate listing websites. Because of a sudden downturn in business conditions and an immediate need for money, Jain’s landlord wanted to sell the property and therefore had asked Jain to vacate the premises within 30 days. Jain had been living in the spacious, two-bedroom apartment in North West Delhi for the past five years as it was within a reasonable commuting distance to his workplace. After looking at various rental properties, Jain had come across a furnished apartment identical to his, next door, and met with a broker to discuss it. During the discussion, it came up that an identical apartment in an adjoining locality was for sale at ?12.5 million. Jain was thus faced with a quantitative finance decision of buy versus rent to arrive at the right option for him given his current financial conditions and the potential future benefits.
This case can be used in a corporate finance or financial management course in an undergraduate or MBA program. The case illustrates practical usage of the time value of money concept and techniques to quantitatively evaluate the classic decision of buying versus renting a home. After working through the case and assignment questions, students will be able to do the following:
- Understand the practical concepts and techniques of the time value of money.
- Understand the present and future value estimation framework.
- Estimate relevant cash flows, including equated monthly instalments, after taking into account taxation and opportunity cost considerations.
- Perform quantitative evaluation, using the time value of money framework, for the proposed alternatives of buying versus renting.
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