Financial Planning Exercise $9$

Investing in residential income$-$producing property

Leah Reyes is thinking about investing in residential income$-$producing property that she can purchase for $$280,000.$ Leah can either pay cash for the full amount of the property or put up $$90,000$ of her own money and borrow the rehaining $$190,000$ at $6$ percent interest. The property is expected to generate $$20,000$ per year after all expenses but before interest and income taxes. Assume that Leah is in the $35$ percent tax bracket. $($Hint: Earnings before interest & taxes minus Interest expenses $($if any$)$ equals Earnings before taxes minus Income taxes $($@$35\%)$ equals Profit after taxes.$)$

a$.$ Calculate her annual profit and return on investment assuming that she pays the full $$280,000$ 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 $\%$

b$.$ Calculate her annual profit and return on investment assuming that she borrows $$190,000$ at $6$ percent. Do not round intermediate calculations. Round the profit to the nearest whole dollar and ROI to two decimal places.

Annual profit $5$

Return on Investment $\%$

c$.$ What was the effect of using leverage on Leah's rate of return? $-$ Select$-$