Question

An investor has invested $600,000 in a new rental property. Her estimated annual costs are $16,000...

An investor has invested $600,000 in a new rental property. Her estimated annual costs are $16,000 and annual revenues are $48,000. What rate of return per year will investors make over a 30 year-period if the property can be sold for $500,000 at the end of the 30-year period?

(Can you solve without excel. please and thank you)

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Homework Answers

Answer #1

Let ROR be i%, then

-600000 + (48000 - 16000)*(P/A,i%,30) + 500000 * (P/F,i%,30) = 0

32000 *(P/A,i%,30) + 500000 * (P/F,i%,30) = 600000

dividing by 10000

3.2 *(P/A,i%,30) + 50* (P/F,i%,30) = 60

using trail and error method

When i = 5%, value of 3.2 *(P/A,i%,30) + 50* (P/F,i%,30) = 3.2 *15.372451 + 50* 0.231377 = 60.760715

When i = 6%, value of 3.2 *(P/A,i%,30) + 50* (P/F,i%,30) = 3.2 *13.764831 + 50* 0.174110 = 52.752966

using interpolation

i = 5% + (60.760715-60) /(60.760715-52.752966)*(6%-5%)

i = 5% + 0.09% = 5.09% (Approx)

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