Jaime Thompson is thinking about investing in some residential income-producing property that she can purchase for $200,000. Jaime can either pay cash for the full amount of the property or put up $50,000 of her own money and borrow the remaining $150,000 at 8% interest. The property is expecting to generate $30,000 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 $200,000 of her own funds or (b) borrows $150,000 at 8%. Then discuss the effect, if any, or leverage on her rate of return.
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