INDUSTRIAL ECONOMIC ANALYSIS

Lucinda Lacy purchased a foreclosed house today for $105,500 by making a down payment of 15% of the purchase price and paying closing costs of:

Loan origination fee 1.7% of purchase price

Appraisal fee $325

Survey fee 210

Attorneys fee 420

Processing fee 300

Escrow fee 240

Other miscellaneous costs 620

Lucinda has a mortgage loan with an interest rate of 3.9% APR, compounded monthly for 30 years. Her taxes and insurance are $375 per month. Lucinda has an estimate for a contract for $8,500 firm, fixed price 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 $135,000. Her selling expenses would be 7% sales commission plus $1000.

Assignment

1. Determine manually (handwritten), by trial and error, Lucindas rate of return, if she owns the house for 6 months.

Note: To get full credit, you must show the manual (handwritten), calculations, including the ball-park method with all the appropriate cash flow diagrams.

2. Prepare a typed Amortization chart that how much would be owed at the end of each month for six months and the amount of the payoff value.

3. Prepare an EXCEL spreadsheet to determine Lucindas rate of return if she owns the house for 6 months (comparable to number 1).

4. Use the spreadsheet to determine the ROR if Lucinda keeps the house for 6 months and the selling price is $132,500 instead of $135,000.

5. Use the spreadsheet to determine the ROR if the sales price is $131,500 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.

Show the equations for the EXCEL program