Return on investment

Question

On January 1, Pete Rowe bought a ski chalet for $51,500. Pete is renting the chalet for $56 per night. He estimates he can rent the chalet for 200 nights. Pete’s mortgage for principal and interest is $449 per month. Real estate tax on the chalet is $510 per year.

Pete estimates that his heating bill will run $70 per month. He expects his monthly electrical bill to be $15 per month. He pays $11 per month for cable television.

 

What is Pete’s return on the initial investment for this year? (Round your answer to the nearest tenth percent.)

 

Assume rentals drop by 25% and monthly bills for heat and electricity drop by 15% each month. What would be Pete’s return on initial investment? (Round your answer to the nearest tenth percent.)

Answer 1

Initial cost:  $51,500

 

Earnings:  (56 $/night)(200 nights) = $11200

 

Payments:  449(12) = 5388  mortgage/interest

                                   510  real estate tax

70+15+11= 96(12)=  1152  utility bills

                               --------

                               $7050 per year paid out

 

Money earned:  11200 - 7050 = $4150 earned over the year

 

The question then is what percentage of 51,500 is 4150:

 

(4150/51500)(100) = 8.0582% ≅ 8.1 % return for the year

*****************************************

 

If rentals drop by 25% then the new amount of rentals

will equal 75% of the original estimate:  .75*11200 = $8400 earnings

 

If monthly bills for heat and electricity drop by 15% they will

each then equal 85% of what they were originally:

Heat:  .85*70 =    $59.50 per month

Electric: .85*15 =   12.75 per month

Cable:                    11.00 per month

                           ----------

                             ($83.25 per month)(12) = $999 per yr utility payments

 

Total payments:  5388  mortgage/interest

                           510  real estate tax

                           999  utilities

                        ---------------

                         $6897 paid out for the year

 

Earnings - payments = 8400 - 6897 = $1503 made for the year

 

(1503/51500)(100) = 2.9% return for the year