WK7 _Tony_Deciding on best use of my building

Problem Definition

I am putting up a building and there are several uses to which the building can be put. I need to take a decision on the best use for the building.

Proposed Alternatives/Solutions

1. Reside in the building with my family

2. Let out the building for a rental income

3. Sell the building for a profit

Quantitative and Qualitative Analysis of Alternatives

Option 1

I currently live in a rented apartment. The rent I pay is $4,605 pa, maintenance for 1^st year was $2,302, subsequent years 10% i.e $460. The landlord increased the rent this year to $5,263. To reside in the building I am constructing I will save what I am currently paying as rent and part of the maintenance cost as the building will still be new. I will also be free from continual rent increase by the landlord, inconvenience of sharing limited facilities with neighbours and will have privacy. Yearly rent savings will be 5,263 + 10% (maint) = $5789.3. I will however drive longer distance to work but will enjoy the comfort of the new home as it was designed to taste. If the savings remain at this level it will take 23 years to recoup my investment in the property. The invested sum is shown in Option 2 below

Option 2

This option requires me to remain in my present rented apartment and earn a rental income from the new building. Data supporting this option are as follows:

Cost of land/fence $24,342

Cost of construction $100,000

Interest on borrowed funds $6,578

Total cost of project $130,920

Going rent $6,578pa: 20 years to recoup investment, keeping rent constant.

Annual maintenance is 10% of rental income: $658

Net rental income: 6,578 – 658 = $5,920

The apartment is near my office so I walk to & from the office. I will miss the comfort, convenience and privacy of the new home.

Option 3

This option involves selling off the completed building to earn a profit on the investment. I will remain in my present rented apartment.

Data supporting this option are:

Cost of project as in Alternative 2: $130, 920

Going selling price $177,632

Consider a 20yr period as in lease option, yearly income ignoring the interest on the received money, is $8,881

Investment is recouped within a year. I will miss the comfort, convenience and privacy of the new home. I will also be exposed to continual rent increases by the landlord of my rented apartment

Selection Criteria

1. Yearly income

2. Comfort & Convenience

3. Distance from office

4. Time to recoup investment

5. Privacy

Analysis & comparison of alternatives

The comparative analysis will be done using the additive weighting technique. Additive weighting is probably the most popular single-dimensional method because it includes both the performance ratings and the importance weights of each attribute when evaluating alternatives [1]. Furthermore, it produces recommendations that tend to agree with the intuitive feel of the decision maker concerning the best alternative [2]. The technique uses importance weights established from ordinal ranking of the attributes as shown in table 2 and nondimensional values of the attributes. The nondimensional values are established using the following formulas;

Rating = Worst outcome-outcome being made dimensionless - when low values are best [3]

Worst outcome-Worst outcome

Rating = Worst outcome-outcome being made dimensionless - when high values are best [4]

Worst outcome-Worst outcome

Summarised below are the base data for the various options.

Attributes	Option 1- Reside in Bldg	Option 2: Lease Building	Option 3: Sell Building
Yearly income/savings	$5,789	$5,920	$8,881
Comfort & Convenience	Excellent	Fair	Fair
Distance from Office	5km	0.5km	0.5km
Time to recoup investment	23years	20years	1year
Privacy	Excellent	Fair	Fair

Table 1

Ordinal Ranking of attributes

Comfort & convenience >yearly income

Comfort & convenience>distance from office

Comfort & convenience>privacy

Comfort & convenience>time to recoup investment

Privacy>yearly income

Privacy>distance from office

Privacy>time to recoup investment

Yearly income>distance from office

Yearly income>time to recoup investment

Time to recoup investment>distance from office

Ranking: Comfort =4; Privacy = 3; Yearly income = 2; Time to recoup investmt = 1; distance from office = 0

Nondimensional scaling of attributes

Attribute Value Rating Procedure Dimensionless Value

Yearly income $5,789 yearly inc – 5,789/3,092 0.0 (opt 1)

5,920 0.04 (opt 2)

8,881 1.00 (opt 3)

Comfort Excellent (comfort^a – 1)/2 1.0 (opt 1)

Fair 0.0 (opt 2)

Fair 0.0 (opt 3)

Distance fr off. 5km (5 – dist)/4.5 0.0 (opt 1)

0.5km 1.0 (opt 2)

0.5km 1.0 (opt 3)

Time to recoup 23yrs (23-time to recoup)22 0.0 (opt 1)

20 0.14 (opt 2)

1 1.0 (opt 3)

Privacy Excellent (Privacy^b-1)/2 1.0 (opt 1)

Fair 0.0 (opt 2)

Fair 0.0 (opt 3)

a. Scale of 1-3 use. 3 –excellent, 2-good, 1-fair

b. Ditto

Attribute	Relative rankc	Normalised weight (A)	Option 1 (B) (A xB)	Option 2 (B) (AxB)	Option 3 (B) (AxB)
Yearly income	3	3/15 = 0.2	0.0 0.00	0.04 0.008	1.0 0.20
Comfort	5	5/15 = 0.33	1.0 0.33	0.0 0.0	0.0 0.00
Distance	1	1/15 = 0.07	0.0 0.00	1.0 0.07	1.0 0.07
Time	2	2/15 = 0.13	0.0 0.00	0.14 0.018	1.0 0.13
Privacy	4	4/15 = 0.27	1.0 0.27	0.0 0.0	0.0 0.00
Sum	15		0.60	0.096	0.40

Table 2: Additive weighting technique

C –relative rank = ordinal rank + 1. Highest rank, best

B – Dimensionless value of attributes

Selection of Best Option

The decision on best option is based on the comparative analysis done using the additive weighting technique. When using the technique the option or alternative with the highest weighted score is the best option. From Table 2 above, that option is option 1 (score 0.60) which is to reside in the building with my family. Comfort and privacy are very important to me and they weighed heavily in this decision. The technique gave a recommendation that agreed with my intuitive feel. This is what I like most about the technique.

Performance monitoring and Post Evaluation

1. Maintain very well the new building so as to retain the value and hence continued comfort

2. Have good security personnel to maintain privacy

References

1. Engineering Economy -15^th Edition.14.7.2-Additive weighting techniques

2. Ibid

3. Engineering Economy -15^th Edition.14.7.1-Nondimensional scaling

4. Ibid