Calculating Interest Kates [LO3] Solve for the unknown interest rate in each of the following:
To calculate: The rate of return
Introduction:
Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.
Answer to Problem 4QP
The rate of return is as follows:
Particulars | Present value | Years | Interest Rate | Future value |
Investment A | $181 | 4 | 13.18% | $297 |
Investment B | $335 | 18 | 6.72% | $1,080 |
Investment C | $48,000 | 19 | 7.37% | $185,382 |
Investment D | $40,353 | 25 | 10.86% | $531,618 |
Explanation of Solution
Given information:
Investment A has a present value of $181, future value of $297, and a 4-year investment period. Investment B has a present value of $335, future value of $1,080, and an 18-year investment period.
Investment C has a present value of $48,000, future value of $185,382, and a 19-year investment period. Investment D has a present value of $40,353, future value of $531,618, and a 25-year investment period.
The formula to calculate the rate of return:
Where,
“P” refers to the principal amount invested
“r” refers to the rate of interest or return
“t” refers to the number of years or periods of investment
“FV” refers to the future value or the current market value
Compute the rate of return of Investment A:
Hence, the rate of return of Investment A is 13.18%.
Compute the rate of return of Investment B:
Hence, the rate of return Investment B is 6.72%.
Compute the rate of return of Investment C:
Hence, the rate of return Investment C is 7.37%.
Compute the rate of return of Investment D:
Hence, the rate of return Investment D is 10.86%.
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Chapter 5 Solutions
Fundamentals of Corporate Finance
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