economics engineering

Lucinda Lacy

Lucinda Lacy purchased a house today for $111,500 by making a down payment of 15% of the purchase price and paying closing costs of:

• Loan origination fee                1% of purchase price
• Appraisal fee                          $375
• Survey fee                                 325
• Attorney fee                             475
• Processing fee                           450
• Escrow fee                                300
• Other misc. costs                      875

Lucinda has a bank loan of 3.5% APR, compounded monthly for 15 years.  Her taxes and insurance are $495 per month.  Lucinda has an estimate for an $18,000 firm, fixed price contract to remodel the house and this expense will be equally distributed over the period of her ownership.  After remodeling, she estimates that she could sell the house for $149,000.  Her selling expenses would be 6.0% sales commission plus $1,500.

Assignment

1.  Determine manually, by trial and error, Lucinda’s rate of return, if she owns the house for 6 months.  Show the manual calculations, including the ball-park method.

Note:  This Part#1 must be ALL HAND CALCULATIONS – none of Part#1 can be done by Excel.

·      For interpolation using the trial and error method, you must use 2 adjacent interest rates; for example, 10% and 11%, not 10% and 15%.

To get full credit, you must show ALL handwritten manual calculations (including the value of the factors) of how you got the ROR in Part#1. (10 Points)

2.  Prepare an EXCEL spreadsheet to determine Lucinda’s rate of return if she owns the house for 6 months. (5 points)

3.  Use the Excel spreadsheet to determine the ROR if Lucinda keeps the house for 6 months and the selling price is $145,500 instead of $149,000.   (3 points)

4.  Use the Excel spreadsheet to determine the ROR if the sales price is $155,000 and the repairs take longer than expected and Lucinda keeps the house for 12 months before selling and the remodeling contract is for 12 months instead of 6.  (2 points)

Submit the actual EXCEL Spreadsheet file

Step-by-Step Procedure for Calculating Lucinda Lacy

1-    Calculate the monthly payment

2-    Calculate the amount of the loan payoff after she owns the house for 6 months

3-    Determine what she invested on day 0

4-    Determine her monthly expenses

5-    Determine her return

6-    Use the Ball Park method to find i*