Reference no: EM132194134

Question - Yogajothi is thinking of investing in a rental house. The total cost to purchase the house, including legal fees and taxes, is £115 000. All but £15 000 of this amount will be mortgaged. He will pay £800 per month in mortgage payments. At the end of two years, he will sell the house, and at that time expects to clear £20 000 after paying off the remaining mortgage principal (in other words, he will pay off all his debts for the house, and still have £20 000 left). Rents will earn him £1000 per month for the first year, and £1200 per month for the second year. The house is in fairly good condition now so that he doesn't expect to have any maintenance costs for the first six months. For the seventh month, Yogajothi has budgeted £200. This figure will be increased by £20 per month thereafter (e.g., the expected month 7 expense will be £200, month 8, £220, month 9, £240, etc.). If interest is 6% compounded monthly, what is the present worth of this investment? Given that Yogajothi's estimates of revenue and expenses are correct, should Yogajothi buy the house?