BUFI CH.17

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Suppose Shaan invested just $8,700 of his own money and had a $96,500 mortgage with an interest rate of 7.6 percent. After three years, he sold the property for $145,000. (a) What is his gross profit? (b) What is his net profit or loss? (Input the amount as a positive value.) (c) What is the rate of return on investment? (Negative amount should be indicated by a minus sign. Enter your answer as a percent rounded to 2 decimal places.)

(a) Gross profit = Selling price - Purchase price = $145,000 - 105,200 = $39,800 (b) Net profit or loss = Gross profit - Interest paid = Gross profit - (Interest rate percent × Amount borrowed × Number of years) = $39,800 - (0.076 × $96,500 × 3) = $17,798 (c) Percent return on investment = Net profit / Amount invested = 17,798 / 8,700 = 2.0457, or 204.57%

Assume Juan bought 16 ounces of gold for $3,680 as protection against rising inflation. He sold half the gold in 1980 at a price of $730 an ounce. Juan sold the other half in 1982 when the price was $370 an ounce. What was Juan's profit in 1980 and in 1982?

Cost per ounce = Total cost / Total ounces = $3,680 / 16 = $230 Profit 1980 = (Selling price per ounce - Purchase price per ounce) × Sales quantity in ounces = ($730 - 230) × (16 / 2) = $4,000 Profit 1982 = (Selling price per ounce - Purchase price per ounce) × Sales quantity in ounces = ($370 - 230) × (16 / 2) = $1,120

Assume Juan bought 24 ounces of gold for $3,960 as protection against rising inflation. He sold half the gold in 1980 at a price of $630 an ounce. Juan sold the other half in 1982 when the price was $400 an ounce. What would Juan's profit have been if he had sold all of his gold in 1980?

Cost per ounce = Total cost / Total ounces = $3,960 / 24 = $165 Profit = (Selling price per ounce - Purchase price per ounce) × Sales quantity in ounces = ($630 - 165) × 24 = $11,160

Assume your home is assessed at $250,000. You have a $198,000 loan for 20 years at 7 percent. Your property tax rate is 1.0 percent of the assessed value. In year one, you would pay $13,860 in mortgage interest and $2,500 in property tax (1.0 percent on $250,000 assessed value). What is the total deduction you can take on your federal income tax return?

Federal income tax deduction amount = Mortgage interest + Real estate taxes = $13,860 + 2,500 = $16,360

Felice bought a duplex apartment at a cost of $160,000. Her mortgage payments on the property are $1,900 per month, $909 of which can be deducted from her income taxes. Her real estate taxes total $2,496 per year, and insurance costs $1,428 per year. She estimates that she will spend $1,548 each year per apartment for maintenance, replacing appliances, and other costs. The tenants will pay for all utilities. What monthly rent must she charge for each apartment to break even? (Do not round intermediate calculations. Round your answer to 2 decimal places. Ignore any tax effects.)

Monthly costs = Mortgage payment + Real estate taxes + Insurance costs + Maintenance costs =$1,900 + ($2,496 / 12) + ($1,428 / 12) + [2 × ($1,548 /12)] = $1,900 + 208 + 119 + 258 = $2,485 Break-even monthly rent per apartment = Monthly costs / 2 = $2,485 / 2 = $1,242.50

Audra owns a rental house. She makes mortgage payments of $1,300 per month, which include insurance, and pays $2,100 per year in property taxes and maintenance. Utilities are paid by the renter. What should Audra charge for monthly rent to make $3,800 profit each year? (Round intermediate calculations and final answer to 2 decimal places. Ignore any tax effects.)

Monthly costs = Mortgage payment + Real estate taxes and maintenance = $1,300 + ($2,100 / 12) = $1,475 To break even, Audra must charge monthly rent equal to her monthly costs. Profitable rent = Break-even monthly rent + Desired monthly profit =Break-even rent + (Desired annual profit / 12) = $1,475 + ($3,800 / 12) = $1,791.67

Audra owns a rental house. She makes mortgage payments of $870 per month, which include insurance, and pays $1,740 per year in property taxes and maintenance. Utilities are paid by the renter. (Ignore any tax effects.) How much should Audra charge for monthly rent to cover her costs?

Monthly costs = Mortgage payment + Real estate taxes and maintenance = $870 + ($1,740 / 12) = $1,015

Dave bought a rental property for $230,000 cash. One year later, he sold it for $236,000. Suppose Dave invested only $115,000 of his own money and borrowed $115,000 interest-free from his rich father. What was his return on investment? (Negative amount should be indicated by a minus sign. Enter your answer as a percent rounded to 2 decimal places.)

Return on investment = Profit / Initial investment = (Selling price − Purchase price) / Investment = ($236,000 − 230,000) / $115,000 = 0.0522, or 5.22%

Rani bought a rental property for $137,000 with no borrowed funds. Later, she sold the building for $213,000. What was her return on investment? (Enter your answer as a percent rounded to 2 decimal places.)

Return on investment = Profit / Purchase price = (Selling price - Purchase price) / Purchase price = ($213,000 - 137,000) / $137,000 = 0.5547, or 55.47%

Dave bought a rental property for $230,000 cash. One year later, he sold it for $236,000. What was the return on his $230,000 investment? (Negative amount should be indicated by a minus sign. Enter your answer as a percent rounded to 2 decimal places.)

Return on investment = Profit / Purchase price = (Selling price − Purchase price) / Purchase price = ($236,000 − 230,000) / $230,000 = 0.0261, or 2.61%


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