Question

Q1. Mr Sultan al Hadrami is planning to construct his own house. He is planning to construct the house in a phased manner. At present he is working with Oman Air and is earning salary RO 12000 every year . The Cost of Construction of the house is RO 50,000 if the construction is completed in one year. However if the construction is done in parts, the cost of contrition will increase and may go up to 60000 if completed in six years. Mr Sultan is seeking your advice on the two option.

Option A- Take a loan from bank for RO 50,000 now and construct the house in one year. The loan will be for 6 years with interest on the loan @ 8%p.a. The amount of the loan could be repaid in monthly installments.

Option B Construct the house in parts ( without loan ) In this option Mr Sultan expects to save RO 900 every month. At the end of each year he will used his saving and construct some part of the house. So in this way he will take six years to complete the House. The interest on saving will be @ 6%p.a..

You are required to evaluate the above two options and suggest:

a) The total amount to be paid in Option A.

b) The total amount to be saved and used in construction in Option B.

Answer 1

a) If Sultan takes a loan, Cost of construction = RO 50,000

Loan amount (P)= RO 50,000

Interest charged monthly(R) = 8/12 = 1.5%

No of monthly installments(n) = 12 x 6 = 72

Monthly payment = [P x R x (1 + R )^n / [(1 + R)^n - 1 ]

= [50000 x 0.015 x (1+0.015)^72] / [(1 + 0.015 )^72 - 1]

= RO 1,140.39

Therefore, the amount to be paid in option A = 1140.39 x 72 = RO 82,108

B) If Sultan saves RO 900 every month

PMT = RO 900

n = 72

R = 6 / 12 = 0.5%

FV = PMT x [(1 + R)^n - 1] / r

FV = 900 x [(1 + 0.005)^72 - 1] / 0.005

FV = 77767.97 = RO 77,768

So the amount saved in 6 years by saving RO 900 per month at 6% per annum is equal to RO 77,768

Please like the solution of satisfied and drop a comment in case of any doubt.

Thankyou