Question

Solve by hand.

If a company invest $10,000 and received $2,775 per year for five years, the rate of return on the investment is nearest to?

Answer 1

Investment, P = $ 10,000

Amount received,A = $ 2,775 every year

Interest rate = i%

Time, n = 5

This can be written as

This we can solve using Trial and error method.

Let us assume rate of return is 10%

The present value of cash inflow at a rate of 10% is greater than $ 10,000. Thus increase I.

Let us assume i=13%

At a rate of 13% it is less than 10,000. Thus, the required rate lies in between 10 to 13%. We can calculate the rate through linear interpolation technique as follows

Rate of Return = 12.05%

Please contact if having any query thank you.