Question

Suppose the cost of the investment today is N$ 7000.00 and in five year's time the return is N$22 500. Calculate the annual internal rete of return (compounded quarterly) on this investment.

Answer 1

Here is the solution,

We are solving it as per time value concept.

We have,

Future Value - N$ 22500

Present Value - N$ 7000

t - duration - (5Years *4Quarter) = 20

Let, interest rate quarterly be 'r'

annual internal rete of return (compounded quarterly) be 'i'

Formula - FV = PV (1+r)^t * 1/100

Puting figures

N$ 22500 = N$ 7000 (1+r)²⁰ * 1/100

r = 6.01 (By using Power Formula)

annual internal rete of return (compounded quarterly) 'i' = r*4 i.e. 6.01% * 5 = 24.04% P.a.