Question

An investment is expected to produce $2,000, $800, $0, $3,000, $5,000, and $5,000 at the end of first, second, third, fourth, fifth, and sixth year, respectively. Today, the investment costs $12,500. Is this investment profitable? What will be the annual investment yield or rate of return?

Answer 1

Solution:

We can evaluate the investment on the basis of profit as follow:

Net Profit=Total Return-Investment

=[($2000+$800+$0+$3000+$5000+$5000)-$12,500]

=$15,800-$12,500

=$3,300

Since,there is net profit/Income of $3300 from the investment,hence the investment is profitable.

b)Calculation of annual investment yield or rate of return:

Rate of return=Net Income/Investment

=$3,300/$12,500=0.264 or 26.4%

Annual rate of return=[(1+Rate of return)1/no. of years of investment]-1

=[(1+0.264)^1/6]-1

=0.0398 or 3.98%