Question

It is 2016 and you notice that there are many television programs about people who "flip" houses. That is, programs in which people buy houses, remodel them, and try to sell them later at a profit. You think that this sounds intriguing and consider buying a house to sell one year later. Assume that this house costs $1M today. Your forecasting model suggests that the market value of the house could take on one of five values next year: $600K, $800K, $1M, $1.2M, or $1.4M. Assume that remodeling the house is costless. a) Suppose that you have $800K in personal cash. To pay for the $1M house, you decide to borrow $200K from the bank. You promise to repay the bank what you borrowed plus 5% interest next year. You plan to sell the house in one year, repay the bank, and keep whatever money is left over. There are five possible values that the house could take on next year. What is the percentage return on your personal cash investment for each of the five possible house values? / b) Suppose instead that you only have $500K in personal cash. To pay for the $1M house, you decide to borrow $500K from the bank. You promise to repay the bank what you borrowed plus 5% interest next year. You plan to sell the house in one year, repay the bank, and keep whatever money is left over. There are five possible values that the house could take on next year. What is the percentage return on your personal investment for each of the five possible house values? c) For each of the previous two questions, graph the percentage return from your personal investment on the y-axis versus the percentage change in the value of the house on the x-axis. For each graph, draw a straight line through the five points. Report which graph has the steeper line and explain why you think this is the case.

Answer 1

ANSWERING (a) and (b) subpart for the question:

Attaching the images below describing each return on the personal cash invested for all the five scenarios for the house, taking into consideration the five values as the final value of investment in each scenario.

MT w T F s 3 5 10 11 12 27 14 15 16 17 18 19 21 22 23 24 25 26 28 29 30 MARCH 2014 THURSDAY WK 13086-279 (1) goitial Investment = 1000,000 Personal cash BODO DO Bank loan 22,00.000, Repayable to bank = 8,00, ODO +(50.X9,00,000) mal OP - 8,0D0DD + 10,odo 2.10,000 ist scenaato final value of bouse 2 600,000, 6-) Bank Repayment 210,00 cole Remaining value:-) 390,000 Retion on pessonal cash bloyelo! Holz 3,90,000 X 10D o 8,00,000 43.75) APR MAY and scengaio oplo brit final value of house = 8,00,000 600 - Bank Repayment = 9.10,00D 5,90,00D Remaining UN Retuon on personal cach = $ 90, o po 8,00,000 X100 = 3750

23 24 25 26 27 28 29 Zo 2014 MARCH 5 TW FRIDAY 087-278 • WK 13 7 M 31 3 MARCH 2014 30 2 20 4 5 9 10 11 12 13 14 16 17 18 19 20 21 s 9.00 10.00 Remaining 12.00 3e scenario ! to grootgurat loitine o final value of houses 110,00.000 b) Bank Repayment = 210.00. 27,90,00 10,6% 102) 7 000.50.6 11.00 0 0 Retuon 2,90.000 X (ou 8,00.000 - 98.75% Olape2 +24 CHAP 58,0 Yth scenadlo i do gola boi? Pinal value = 10,20,000 2010 OP e o Bank Repayment) = $10,00D Remainin 8,10,00D 4200 hora do routt sro' Retuon 28,10,000 X 100 - 10:250% DO S8,00, ODD -3.00 100 00 5th scenasio final value 10,40,00 50,00 € - 900(-) Bonk Repay - 8.10,000 8,30,000 TO OPZ Refuan = 8,30,00D x 100 STOP doo 8,00,000 auto 103.75 00

2012 APRIL 5 M T w F S 1 2 3 4 5 2 e 10 11 | 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 29 27 28 29 30 MARCH 2014 SATURDAY WK13 - 088-277 9.00 1000 Initial investment = 10,00, ooo cu un personal cosh = 5,00,000 a Bank Loan, en S.OD, DO Bank Repayable 5100,000 US X500.000 solo = 35,000 + 5,00, DDD = 5, 25,ODO 11.00 1st Scenario Final value= 6,00,000 o Bank Repayment - $ 28,00 75,0 DD Retuan - 75,00o xiloo some 5,00,000 APR and Scenasio Olongan 2 GOU, ON DIEU final value = 8,00, 800 como ? ( Bank Repaytle = 5, 28,000 Si 9,75,000 Retuon su git5,000 x 100 00.500,000 SUNDAY 30

S M T W 10 11 12 13 23 24 25 26 27 2014 MONDAY 090-275 • WK 14 MARCH 2014 30 31 2 3 9 4 16 17 18 19 20 334 9.00 10,00 Scenafto themboung loitine CURS UT Final valuese 10,00,000 o Bank Repayable' $ 25.000 4 75,000 200,2x02.) 60,00,2 oldungey 11:00 a Retuone 4, 75,000 x 100 95% GT 5,00,000 4th Scenato bisogon Final value = 10,20,000 mo, Bank Repayable - 525 000 12.00 2.00 4,95,000 3.00 smo Relyan -4,95,000 X 100 S,00,000 4.00 99 on 00 5th scenario oson brea Groo0,8 - su final value = 10,40,000 000,23 O Bank Repayable = $ 25,000 coo2 fie 5,15,000 o Retuon 515,ooo xiloo Go So0, ovo 103 %

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