Sarah is considering purchasing a log cabin as an investment. She intends to rent it out to holiday makers to generate an income. The purchase cost of the cabin is £85,000 which she can pay in cash, but she will also have to pay £150 per month as a maintenance charge to the management company. She can expect to rent out the cabin for 14 weeks per year, where some weeks will be low season (earning £500 per week) and some weeks will be peak season (earn £800 per week). The ratio of low to peak weeks will be 5:2.
How many years will it be before she has paid off the purchase cost of the cabin, and will begin to make a profit on her investment?
This is a complex but realistic video and students will need to pay attention to the large amount of information. It requires students to understand ratio and basic arithmetic and sounds tricky at first. This calculator question takes most students less than 5 minute to solve, and as such, the extension questions often work well to stretch more able students. By stressing the changing nature of costs over many years, it can lead nicely on to compound interest.
Teachers could extend the learning by considering:
- What assumptions have been made in calculating the number of years to pay back the investment?
- Sarah’s partner Jake suggests that all weeks should be charged at a rate of £500 per week which would attract 2 more weeks of rental per year. How would this affect the number of years needed to pay off the purchase cost?
- If Sarah wanted to decrease the number of years before making a profit, what could she do? Make recommendations supported by financial calculations.