Question

If SR 6,000 is invested now in an investment that is expected to yield SR 120 per year for 10 years and SR 8,000 at the end of 10 years, what is the rate of return (chose the closest answer)?

		5.16%.
		4.69%.
		3.5%.
		6.1%.
		7.42%.

Answer 1

Ans. Option b

Invested amount, P = SR 6000

Yearly yield, Y = SR 120

Redemption amount, F = SR 8000

Years to maturity, n = 10 years

Rate of return, r = ?

The rate of return is the interest rate at which net present value of the investment is zero, thus, net present value,

NPV = 0 = - 6000 + 120/(1+r) + 120/(1+r)^2 + 120/(1+r)^3 + 120/(1+r)^4 + 120/(1+r)^5 + 120/(1+r)^6 + 120/(1+r)^7 + 120/(1+r)^8 + 120/(1+r)^9 + 120/(1+r)^10 + 8000/(1+r)^10

=> r = 0.04689 or 4.689%

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