Reference no: EM131070774

You recently inherited $50,000 from your grandma. You and your husband agree that investing the inheritance for the next 20 years is the reasonable move. After thorough consideration, you have narrowed your investment options to three choices. Choice one is a well-diversified mutual fund portfolio with an expected after-tax return of 7.85%. You and your husband will sell the mutual fund portfolio at the end of 20 years. (Ignore capital gains taxes associated with selling the mutual fund portfolio and assume no transaction costs.) Choice two is a condominium down the street for sale for $94,900. You are confident that you can rent the condo out for $715 a month for the first 3 years, and that rents will increase by 5% every 4 years (i.e. years 8, 12, 16, etc.). The bank will give you a 30 year mortgage on the duplex at 4.80% with a minimum of 20% of the purchase price as a down payment. Your real estate agent assures you that the annual real estate taxes of $1,200 a year will not go up in the next twenty years. Furthermore, he assures you that you can sell the condo for $137,500 in 20 years, net of all transaction charges. He estimates that you will need to replace the furnace in year 7 at a cost of $3,500 and the carpeting in year 15 at a cost of $1,750. You and your husband agree that you will sell the condo after 20 years. Choice three is any combination of the well-diversified mutual fund portfolio and the rental condo. You will sell both investments at the end of 20 years. Which investment option grows your $50,000 inheritance the most at the end of 20 years?