Jaime Thompson is thinking about investing in some residential income-producing property that she can purchase for $200000. Jaime can either pay cash for the full amount of the property or put up $50000 of her own money and borrow the remaining $150000 at 8% interest. The property is expecting to generate $30000 per year after all expenses but before interest and income taxes. Assume that Jaime is in the 28% tax bracket. Calculate her annual profit and return on investment assuming that she (a) pays the full $200000 of her own funds or (b) borrows $150000 at 8%. Then discuss the effect if any or leverage on her rate of return.
