CASE STUDY 5: TIME VALUE OF MONEY- A

HOUSE INVESTMENT DECISION DILEMMA

BY: M NEHA REDDY
MBA 1ST YEAR

1. Ans.
The concept of time value of money is significant because it directs
savers and financial supporters on step-by-step procedures for
maximising their monetary assets and achieving their monetary aims.
These ideas are essential for developing appropriate financial information
and applying it to your purchasing power, as well as your savings and
investments.

2. Ans.
Mr.Jain would be required to pay an initial instalment of 20% on
Rs.1,25,00,000, which would be Rs. 25,00,000, and the remainder would
be paid by EMI at a set rate of 10.25 percent for an indefinite period of
time.
EMI is 98,164/-

3. Ans.
The monthly payments for the proposed alternative to buy is
EMI =₹98,164.34
Propertytaxper month=₹10,000/12 =₹833.33
Society charges =₹1000/month less total tax exemption from interest and
principal amount / month= ₹3,00,000/12 =₹25,000
Therefore the monthly payments for the proposed alternative to buy is
=(₹98,164.34+₹833.33+₹1000- ₹25,000) =₹74,997.67

4. Ans.
The monthly payments for the proposed alternative to rent is
Monthly rent ( including other facilities) =₹30,000
Society charges = ₹1000/month
Therefore the monthly payments for the proposed alternative to rent is
=(₹30,000+₹1000) =₹31,000

5. Ans.
The total amount paidfor the apartment including( propertytax, society
charges , stampduty, transfer duty, registrationfee , downpayment ) after
20 years would be
Property tax=₹10,000x20=₹2,00,000
Society charges =₹1000x20x12=₹2,40,000
Down payment =₹25,00,000
Total amount paidas EMI =₹2,35,59,344
Stamp duty,transfer duty andRegistration fee =7% on ₹12.5million
=₹8,75,000
Total =₹2,73,74,344
Capital appreciation on apartment at conservative 7% annual appreciation
after 20 years =₹4,83,71,056 value after 20years (₹1,25,00,000 purchase
cost)
Capital gain on selling the apartment after 20years =₹2,09,96,613
Present value of the capital gain PV=FV/ (1+r / n)n
=₹2,25,16,287.2

6. Ans.
Based on the analysis on behalf of Mr.Jain, (assuming he can afford to
pay the EMI and also his living expenses) I would suggest Mr.Jain buy
the apartment because, as per the RBI there’s been a rise in72% of
housing price and the apartment would be even more expensive to buy in
future, and also the GOVT OF INDIA give tax benefits on a home loan
under India’s Income Tax Act under section 24 of the act, a deduction of
up to ₹2,00,000 for the payment of interest and ₹1,50,000 for principal
repayment on housing loans is permitted, this would give a benefit for
Jain, given his marginal tax rate bracket of 30%.