Lucinda Lacy purchased a house today for $111,500 by making a down payment of 15% of the purchase price and paying closing costs of:

Loan origination fee               1% of purchase price

Appraisal fee                          $375

Survey fee                               325

Attorney fee                            475

Processing fee                         450

Escrow fee                              300

Other misc. costs                    875

Lucinda has a bank loan of 3.5% APR, compounded monthly for 15 years. Her taxes and insurance are $495 per month. Lucinda has an estimate for an $18,000 firm, fixed price contract to remodel the house and this expense will be equally distributed over the period of her ownership. After remodeling, she estimates that she could sell the house for $149,000. Her selling expenses would be 6.0% sales commission plus $1,500.

Assignment

1. Determine manually, by trial and error, Lucinda’s rate of return, if she owns the house for 6 months.Show the manual calculations, including the ball-park method.

Note: This Part#1 must be ALL HAND CALCULATIONS – none of Part#1 can be done by Excel.

For interpolation using the trial and error method, you must use 2 adjacent interest rates; for example, 10% and 11%, not 10% and 15%.