Determine manually-trial and error and rate of return

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Reference no: EM131609797

Lucinda Lacy purchased a house today for $111,500 by making a down payment of 15% of the purchase price and paying closing costs of:

Loan origination fee 1% of purchase price

Appraisal fee $375

Survey fee 325

Attorney fee 475

Processing fee 450

Escrow fee 300

Other misc. costs 875

Lucinda has a bank loan of 3.5% APR, compounded monthly for 15 years. Her taxes and insurance are $495 per month. Lucinda has an estimate for an $18,000 firm, fixed price contract to remodel the house and this expense will be equally distributed over the period of her ownership. After remodeling, she estimates that she could sell the house for $149,000. Her selling expenses would be 6.0% sales commission plus $1,500.

Assignment

1. Determine manually, by trial and error, Lucinda’s rate of return, if she owns the house for 6 months. Show the manual calculations, including the ball-park method.

Note: This Part#1 must be ALL HAND CALCULATIONS – none of Part#1 can be done by Excel.

For interpolation using the trial and error method, you must use 2 adjacent interest rates; for example, 10% and 11%, not 10% and 15%.

To get full credit, you must show ALL handwritten manual calculations (including the value of the factors) of how you got the ROR in Part#1.

2. Prepare an EXCEL spreadsheet to determine Lucinda’s rate of return if she owns the house for 6 months.

3. Use the Excel spreadsheet to determine the ROR if Lucinda keeps the house for 6 months and the selling price is $145,500 instead of $149,000.

4. Use the Excel spreadsheet to determine the ROR if the sales price is $155,000 and the repairs take longer than expected and Lucinda keeps the house for 12 months before selling and the remodeling contract is for 12 months instead of 6.

Reference no: EM131609797

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