Respuesta :
Hilary buys a home for $100,000 and puts down 20 percent with a 5 percent mortgage. She sells it after 1 year when the house has declined in value by 4 percent. Ignoring any real estate commissions or mortgage amortization, what has been the rate of return on her investment for the year?
-40 (If 4% mortgage, -36 percent)
Answer:
-41.00%
Explanation:
First and foremost, in determining Hilary's rate of return over the 1-year investment period, we are simply comparing his initial investment with the cash inflow realized after selling the home 1 year thereafter.
His initial investment is the 20% down payment as computed thus:
Down payment=initial investment=20%*$100000
down payment=initial investment=$20,000
In other words, he borrowed 80% of the purchase price, which would be repaid after 1 year with 4% interest
sales proceeds after 1 year=$100,000*(1-5%)
sales proceeds after 1 year=$95,000
loan repayment=$80,000
interest payment=$80,000*4%
interest payment=$3,200
total repaymment=$80,000+$3,200
total repayment=$83,200
cash left after repayment=$95,000-$83,200
cash left after repayment=$11,800
rate of return=(cash inflow/initial investment)-1
rate of return=($11,800/$20,000)-1
rate of return=-41.00%
