Your friend has a holiday house on the South Coast of New South Wales. She is thinking of listing it with the local real estate agent as short-term rental accommodation. This will require a large investment and so she has consulted you for some advice. She gives you the following information: I. She paid a local builder $2,000 last month to draw up some plans for renovations. II. If she goes ahead with the project, renovation costs will be $50,000. III. She will require a 5 year fully amortising loan of $30,000 from the bank at an interest rate of 4% pa, with monthly payments. IV. Rental income is estimated to be $60,000 per year. V. Annual cleaning and maintenance will cost $2,500 per year VI. If she doesnt go ahead with the project, she could sell the house for $250,000. Which of the following statements is NOT correct? Ignore tax.

a. I is a sunk cost which should be excluded from the analysis

b. Annual Net Income will include rental income (IV) less costs III and V.

c. Monthly payments on the loan will be $552.50.

d. To calculate the NPV of the project you would need a discount rate that would represent your friends required return, otherwise known as her cost of capital.

e. VI is an opportunity cost which should be included in the analysis.