Question

You bought an asset for $10,000 and sold it for $20,000 after 10 years. What was the annual rate of return on this investment?

Answer 1

Here the present value (PV) is $10,000 and the future value (FV) is $20,000 in a period (n) of 10 years. Let the annual rate is “r”, which is to be calculated.

By the FV formula,

FV = PV (1 + r) ^n

20,000 = 10,000 (1 + r) ^10

(20,000 / 10,000) = (1 + r) ^10

2 = (1 + r) ^10

2 ^(1/10) = (1 + r) ^ (10/10)

2 ^0.1 = 1 + r

1 + r = 1.07177

r = 1.07177 – 1

= 0.07177

If it is multiplied by 100, the rate would be in percentage form; (0.07177 × 100 = 7.177%.

Answer: The required rate is 7.18% (rounded to 2 decimal places).