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