FIN 115: Chapter 17 FINANCIAL PLANNING PROBLEMS (pp. 563-564)
1. Dave bought a rental property for $200,000 cash. One year later, he sold it for $240,000. What was the return on his
With a $200,000 investment, Dave made a profit of $40,000, which is a 20 percent return on his investment. ($40,000
divided by $200,000)
2. Suppose Dave invested only $20,000 of his own money and borrowed $180,000 (90 percent financing). What was his
return on investment?
With a $20,000 investment (he borrowed $180,000), Dave made a profit of $40,000 ($240,000 - $200,000), which is a
200 percent return on his $20,000 investment. ($40,000 divided by $20,000).
3. Calculating the Rate of Return on Investment. Rani bought a rental property for $100,000 with no borrowed funds.
Later, she sold the building for $120,000. What was her return on investment?
Selling Price = $120,000
Purchase Price = 100,000
Profit = 20,000
Return on = Profit = $20,000
Investment Purchase Price $100,000 = .20
= 20 percent
4. Calculating the Rate of Return of Investment Using Financial Leverage. Suppose Shaan invested just $10,000 of his
own money and had a $90,000 mortgage with an interest rate of 8.5 percent. If after three years he sold the property
a. What is his profit?
b. What is the rate of return on investment?
a. Shaan’s Gross Profit = Selling Price – Purchase Price
= $120,000 – $100,000
Shaan’s Net Profit = Gross Profit – Interest Paid
= $20,000 – $12,279 = $7,721
b. Percent Return $7,721
= = 77.21 percent
on Investment $10,000
5. Analyzing the Return on a Real Estate Investment. Felice bought a duplex apartment at a cost of $150,000. Her
mortgage payments on the property are $940 per month, $121 of which can be deducted from her income taxes. Her
real estate taxes total $1,440 per year, and insurance costs $900 per year. She estimates that she will spend $1,000
each year per apartment for maintenance, replacing appliances, and other costs. The tenants will pay for all utilities.
a. What monthly rent must she charge fore ach apartment to break even?
b. What must she charge to make $2,000 in profit each year/
Answers should be based on the following figures:
a. Total mortgage cost after deducting interest is $819/month.
Total real estate tax is $120/month.
Total insurance cost is $75/month.
Total maintenance cost is $167/month.
Total expense is $1181.
Rent per apartment to break even is $1,181 ÷ 2 or $590.50/month.
b. To earn $2,000 profit, she must add $83.33 to each apartment’s rent, for a total of $678.83 ($590.50 + $83.33).