ENGINEERING ECONOMY

INDIVIDUAL BUSINESS CASE 1

Using the 7 Principles of Engineering Economy

BUSINESS CASE #1:

Your brother attends the University of Virginia and expects to graduate this coming
December. He has a job in California that pays $40,000 per year waiting for him, and
he must
report to work on January 15, 1999. He has no other job offers available to
him.
A potentially tricky decision faces your brother because he owns a small $40,000
house in Charlottesville, and the housing market is in the doldrums. Two years ago
when he purchased the house, he made a $4,000 cash payment on it. He continues
to make $310 per month mortgage payments. Your brother prefers not to rent the
house because of all the headaches involved. His realtor in Charlottesville says the
house can be sold for $34,000 immediately. If your brother wants at least $40,000 for
the house, the realtor says it probably won’t sell for another 15-18 months.

The cost of moving to California is estimated to be $5,000 if your brother uses

professional movers. However, he can pack and move himself for $2,000. Also, he
plans to rent an apartment in California for $600 per month.

He has a pet cat that is named “Blue,” and your brother will take his cat to California
in January. What should your brother do? Give him advice by using each of the seven
principles.

ANSWER:

I will give my brother advice using the seven principles of engineering economy:

Principle 1 - Develop the Alternatives

Since it is my brother’s plan to move to California for his job, we are going to
help him decide in making a choice that may help him for his finances in moving. We
are going to focus on his owned house in Charlottesville.

i) Alternative A is to sell the house immediately.

ii) Alternative B is to not sell the house immediately.
Other options probably exist but we’ll stick to these two alternatives.

Principle 2 - Focus on the Differences

The difference between our alternatives is the amount of benefits it can give us
and how fast it will come to help my brother in his expenses in moving to California.
 If my brother will sell the house, he will earn $34,000 immediately. This could
help already with his expenses and should cover until his first salary will come. On
the other side, if my brother will not sell the house, he can wait for 15-18 months so
that the house will sell for $40,000 but he would still pay for the mortgage every
month.

Principle 3 - Use a Consistent Viewpoint

The perspective of my brother will be respected here and his interest of having
the best outcome from the decisions that we are going to make. It should focus on
what choice would better help him with his finances in moving to California and fast,
since he is asked to report on January.

Principle 4 - Use a Common Unit of Measure

For our situation, we are going to use dollars.

Principle 5 - Consider All Relevant Criteria

The relevant criteria that we can consider is the speed of income and the
interest of my brother.

Principle 6 - Make Uncertainty Explicit

As per the situation there is a risk and uncertainty that the house will be sold
on time or not even if we want to. The maintenance of the house and the housing
market are also uncertain factors.

Principle 7 - Revisit Your Decision

Those uncertain factors stated like the housing market is one that could affect
our final or reevaluated decision. We should make a wise decision not just to get a fast
money but of which decision can make us higher amount.

Recommendation to my brother:
The advice that I could give my brother is to sell the house immediately and
earn $34,000. It is because as of the time we are making the decision, the housing
market is on the rocks, and we are uncertain of what changes will happen in the
future if we are to wait it until it could be sold to its original amount. It is more of a
safer decision. My brother has to make a fast money that could help him finance in
moving to California. It should cover all the needed amount in his moving expenses.
Plus, he still has to pay the mortgage if he decides to wait it for 15-18 months. He will
have no source of income other than the job offered to him which will not be his,
unless he moves to California.