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#1 2007-02-17 05:53:56

ReneeB
Guest

Rate of return

Can someone help me with this problem?

"at the end of each yr for the next 10 yrs you will receive $50.  Initial investment is $320.  what is the rate of return expected?"

I started by by looking at it this way

320 = 50 * (1-(1/(1+r)^10))/r

but impossible to solve...

p.s. i'm not allowed to use a financial calculator

do i just estimate it ..that will take forever and i'm not sure if there will be tables on the exam

Any suggestions?
Thanks.

#2 2007-02-17 06:34:48

mathsyperson
Moderator
Registered: 2005-06-22
Posts: 4,900

Re: Rate of return

I think you may be overanalysing the problem a bit.

If you get $50 for the next 10 years, then that's $500 overall, which makes $820 when added to your original investment.

This is an increase of 820/320 = 2.5625 times the original amount.
To get this over 10 years, the rate of return has to be n, where n^10 = 2.5625.

Therefore, n = [sub]10[/sub]√(2.5625) ≈1.099.

This means that the expected rate of return is 10% to the nearest %.

If you don't get your original investment back, then the method is the same, but you use $500 in the calculation instead of $820.


Why did the vector cross the road?
It wanted to be normal.

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