Option 1:

Julio Cuevas can by a 4-plex apartment complex in central Laredo. The asking price is $185000. He wants to buy it and sell it in 10 years. Because his credit history is excellent and because he has a big ranch in Zapata, Texas community bank is willing to give him a loan at 7% (15 year mortgage). But he still needs to pay down payment of 20 percent. He plans to rent it out, at $700 per apartment per month. He expects to have no problem finding tenants. He will need to put in about 5000 dollars to fix things at this new place before he starts renting them out. He will be able to do that in week. The closing cost will be 7% of property price, but the seller will cover half of it. The maintenance cost for the 4-plex apartment is 400 per montha company has agreed to take care of it. The combined value of property tax, school tax, and county tax is 2.5%. Although these taxes are due at the end of the year, they will be collected by his bank every month. Assume that for tax purpose, there was increase in price of the apartment. Julio currently has the money he needs for this investment in his bank. Julio wants do this for 10 years and the sell it. He expects the price of houses to increases by about 1.5% every year for the next 10 years. The closing cost when he sells it will be 7 percent. He will be paying all of the closing cost.

Option 2:

Participate in financial scheme of International Bank of Commerce, where he puts a certain amount of money in the bank. He will get back one twelfth of 6 percentage of much he deposited every month. And get triple of what he deposited at the end of 10 years. (HINT: for the purpose of this calculation, you can put any amount as the initial amount, it will not affect the IRR).

A) What is the IRR for option 1? Also, draw the cash flow diagram that you will use to calculate the IRR? You will get very little credit if the cash flow picture is incorrect.

B) What is the IRR for option 2? Also, draw the cash flow diagram that you will use to calculate the IRR? You will get very little credit if the cash flow picture is incorrect.

C) Based on the IRR calculation that you did, which option appears to be better?

D) Which option is riskier? What is the risk? And, why is it riskier?