Should i buy or should i rent - Essay Example

Therefore, the main objective of monetary theory analysis is to understand how to analyze and communicate findings of various investment projects. Consequently, this essay discusses the process project evaluation, techniques of evaluation, theory of interest rate, real situation of mortgage business in United Kingdom specifically the interest rates and other important figures. In the end I attempt to answer a question on whether to buy a home or rent a house. I use the conventional methods of evaluating new ventures to arrive at a decision of buying a house.

Capital investments involve spending money on assets that are used to make the business operational. These monies go into meeting the demands of the project. Such demands include wages, utilities costs, land, rent and equipment. This often require colossal amount of startup capital which may be borrowed, raised through equity or saved from earnings. Since money is an important limited resource, the decision to invest on a project must be backed by evidence of profitability and cost benefit analysis.

It is important to note that most capital investment are long term and good choice of project is critical. Besides, other factors like amount of capital which eventually determines the type of project must also be considered. Attention should also be given to risk associated with the business and the payback time, whether long term or short term. It is important to note that the question about best investment choices has no straight forward answer. In other words there is no guarantee that the best investment analyst will advise precisely on the future prospect of the project.

It all depends on both macro and micro economic factors prevailing at the moment. Therefore, it the duty of the investor to evaluate the cost and benefits associated with the project. Although it is not easy to pinpoint a specific way to deal with this challenge, various methods of determining project viability are available. The two most commonly used techniques are net present value (NPV) and internal rate of return (IRR). These techniques involves finding out the projected cash flows and costs.

Nevertheless, the net present value is considered superior to internal rate of return because in some instances a high yield rate does not mean the business is profitable. Internal return rate is based on already determined discount rate which may be not be accurate (Gaylon and Philip 2003). The net present value indicates the value of the business today. It takes into consideration all cash flows and the duration values. These include the initial startup capital and future incomes. The inflows are assigned positive values while outflows are given negative values.

For instance if the initial outlay is ? 100,000, this will be considered negative when computing net cash inflow. This because this money has been used to finance the project operation and is not part of income earned from the project. When all these values are combined, the result gives the net value of the project. In cases where the investor can establish the amount of money flowing in or out at specific fixed time, the money is treated as rate of cash flow. For instance, a landlord who collect ?

3,000 from rents, has a rate of cash inflow rather than cash inflow. The net cash flow ct at specific time = cash inflows at time t – cash outflows at time t The net rate of cash flows in unit time = net