Question

Mallory Comer is thinking about investing in some residential income-producing property that she can purchase for $210,000. Mallory can either pay cash for the full amount of the property or put up $80,000 of her own money and borrow the remaining $130,000 at 7% interest. The property is expected to generate $15,000 per year after all expenses but before interest and income taxes. Assume that Mallory is in the 28% tax bracket. (Hint: Earnings before interest & taxes minusInterest expenses (if any) equals Earnings before taxes minus Income taxes (@28%) equals Profit after taxes.)

Calculate her annual profit and return on investment assuming that she pays the full $210,000 from her own funds. Do not round intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places.
Annual profit  $  

Return on Investment   %

Calculate her annual profit and return on investment assuming that she borrows $130,000 at 7 percent. Do not round intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places.
Annual profit  $  

Return on Investment   %

Answer 1

Mallory Comer ROI problem:

Purchase price of the property = $210,000

Expected annual earnings before interest & taxes = $15,000

Tax rate = 28%

1. Assuming Mallory pays $210,000 pays in full from her funds

Interest expenses = $0

So annual earnings before taxes = $15,000 - $0 = $15,000

Annual earnings after taxes = (100%-28%)*$15,000 = 72%*$15,000 = $10,800

So Annual Profit = $10,800

Annual return on investment = Annual profit/Total investment = $10,800/$210,000 = 5.143% = 5.14%

1. Assuming Mallory borrows $130,000 at 7% interest rate

Interest expenses = 7%*Borrowed amount = 7%*$130,000 = $9100

So annual earnings before taxes = $15,000 - $9100 = $5,900

Annual earnings after taxes = (100%-28%)*$5,900 = 72%*$5,900 = $4248

So Annual Profit = $4,248

Annual return on investment = Annual profit/Total investment = $4,248/$210,000 = 2.023% = 2.02%