Question

Doris Wade purchased a condominium for $50,000 in 1985. Her down payment was $15,000 She financed the remaining amount as a $35,000, 35-year mortgage at 8%, compounded monthly. Her monthly payments are $220. It is now 2000 (15 years later) and Doris has sold the condominium for $100,000, immediately after makin her 180th payment on the unit. Find her effective annual internal rate of return on this investment Choose the closest answer below. O A. 3.1% OB. 10.1% OC. 4.1% OD 8%

Answer 1

	STEP 1	Find the interest rate of Mortgage
	Pv	Amount of loan	$35,000
	Pmt	Monthly payment	$220
	Nper	Number of months of mortgage	420	(35*12)
	RATE	Monthly interest rate	0.5711%	(Using RATE function of excel with Nper=420.Pmt=220,Pv=-35000)
	STEP 2	Find the loan Balance at end of 180 months
	Rate	Monthly interest rate	0.5711%
		Number of months actual payments made	180
	Nper	Number of months of payment balance	240	(420-180)
	Pmt	Monthly payment required	$220
	PV	Loan Balance =Present Value of balance payments	$28,702	(Using PV function of excel with Rate=0.5711%, Nper=240.Pmt=220,)
	STEP 3	Find Terminal Cash Flow:
	A	Selling price at the end of 180 monthds	$100,000
	B	Lumpsum payment forloan balance	$28,702
	C=A-B	Terminal Cash Flow	$71,298
	STEP4	Find the internal rate of returns from the actual cash flows
	Pv	Loan amount received in 1985	$35,000
	Nper	Number of months of actual payments	180
	Pmt	Monthle payment	$220
	F v	Terminal Cash flow at end of 180 months	$71,298
	RATE	Internal Rate of Return	0.869%	(Using RATE function of excel with Nper=180.Pmt=220,Pv=-35000,Fv=71298)
		Annualized Internal Rate of return =RATE*12	10.40%
		Answer B: 10.1%
		This is the nearest to calculated answer
		The difference may be due to various approximations
											Clipboard G Font Alignment Number Styles Cells Editing : x foc =RATE(G5,64,-43) 2 C D E G H I J K L Jouw Na STEP 1 Pv Pmt Nper RATE Find the interest rate of Mortgage Amount of loan Monthly payment Number of months of mortgage Monthly interest rate $35,000 $220 420 (35*12) 0.5711%! (Using RATE function of excel with Nper=420.Pmt=220,P Clipboard Font Alignment E Number Styles Cells Editing : x for =PV(G9,G11,-G12) G H I J K L M N 1 STEP 1 Pv Pmt Nper RATE Find the interest rate of Mortgage Amount of loan Monthly payment Number of months of mortgage Monthly interest rate $35,000 $220 420 (35*12) 0.5711% (Using RATE function of excel with Nper=420.Pmt=220,Pv=-35000) STEP 2 Rate Find the loan Balance at end of 180 months Monthly interest rate Number of months actual payments made Number of months of payment balance Monthly payment required Loan Balance =Present Value of balance payments 11 Nper Pmt PV 0.5711% 180 240 (420-180) $220 $28,702 | (Using PV function of excel with Rate=0.5711%, Nper=240.Pmt=220) 12 13 14 Clipboard Font M Alignment Number Styles Cells Editing G25 X fix =RATE(G22,623,-621,624) 13 В 2 DE G H I J K L M г- PV Loan Balance =Present Value of balance payments $28,702 (Using PV function of excel with Rate=0.5711%, Nper=240.Pmt=220,) 14 15 STEP 3 Find Terminal Cash Flow: 16 Selling price at the end of 180 monthds $100,000 Lumpsum payment forloan balance $28,702 18 C=A-B Terminal Cash Flow $71,298 19 STEP4 Find the internal rate of returns from the actual cash flows Pv Loan amount received in 1985 $35,000 Nper Number of months of actual payments Pmt Monthle payment $220 24 Fv Terminal Cash flow at end of 180 months $71,298 25 RATE Internal Rate of Return 0.8691%] (Using RATE function of excel with Nper=180.Pmt=220,Pv=-35000, Fv=712 180