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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
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 doesn't go ahead with the project, she could sell the house for $250,000. Which of the following statements is NOT correct? Ignore tax. a. Monthly payments on the loan will be $552.50. b. VI is an opportunity cost which should be included in the analysis. c. Annual Net Income will include rental income (IV) less costs III and V. d. I is a sunk cost which should be excluded from the analysis e. To calculate the NPV of the project you would need a discount rate that would represent your friend's required return, otherwise known as her cost of capital
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