Question

. An investor is determining whether to invest $500,000 in a developing a new rental property on Long Island. Her estimated annual costs are $12,000 and annual revenues are $40,000.

a) What rate of return per year will the investor make over a 30-year period ignoring the salvage value?

b) If the property can be sold for $200,000 what is the rate of return?

I need solution in Excel , THANKS

Answer 1

Rate of return = (Profits/Loss)/(Investment) *100

when the salvage value is not included. The investment per year is 500,000/30 = 16666.67 dollars.

The net profit is (40000-16666.67-12000) = 11333.33 dollars

Rate of return = [11333.33/500000]*100 = 2.26%

when the salvage value is considered the investment per year is [500000-200000]/30 = 10000 dollars

The net profit is (40000-10000-12000) = 18000

Rate of return = [18000/500000]*100 = 3.6%

Investment
500000
				rate of return
Investment per year	costs/year	Revenue/year	Profit/Gain	profit/Investment
16666.66667	12000	40000	11333.33333	2.266666667
Salvage value is substracted from the investment (Depriciation)	Rate of return
200000	costs/year	Revenue/year	Profit/Gain	profit/Investment
10000	12000	40000	18000	3.6

Investment
500000
				rate of return
Investment per year	costs/year	Revenue/year	Profit/Gain	profit/Investment
=A2/30	12000	40000	=C5-A5-B5	=D5/A2*100
Salvage value is substracted from the investment (Depriciation)				Rate of return
200000	costs/year	Revenue/year	Profit/Gain	profit/Investment
=(A2-A10)/30	=B5	=C5	=C11-A11-B11	=D11/A2*100

I suggest you to use the formulas provided above and observe the results for better undestanding.

I hope you have understood.

All the Best

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