A 3rd year Queen’s Engineer recently inherited $30,000, and is considering investing in a rental house for her final year at school. She will use the inheritance as a down payment, and the remainder of the costs will be mortgaged. She will pay $1000 per month in mortgage and municipal tax payments. At the end of one year (about the time of graduation), she intends to sell the house, and anticipates being able to clear close to $40,000 (after paying off the remaining mortgage principal), given the current trend in increases in house prices.
She anticipates rents will earn her $1100 per month. The house she wants to buy is in good condition, so she does not anticipate any maintenance costs for the first six months. For the seventh, eighth and ninth month, she has budgeted $200, and this amount will increase by $20 per month thereafter (i.e., the expected 9th month expense will be $200, month 10, $220, month 11, $240, etc).
(a) What is the effective annual interest rate if her mortgage is 3.0% per year compounded monthly?
(b) Draw a well-labeled cash flow diagram for the investment.
(c) What is the Present Worth of the investment?