Question

You're trying to choose between two different investments, both of which have up-front costs of $86,000. investment g returns $151,000 in 7 years. investment h returns $271,000 in 14 years. calculate the rate of return for each these investments.

Answer 1

Answer: The Rate of return earned by Investment G is 8.37%, while the rate of return earned by investment H is 8.54%.

We have

                                   Investment G           Investment H

Future Value of returns         151000                         271000

No. of years                               7                              14

Costs                                 86000                           86000

Rate of Return Formula :

$RoR = \left (\frac{Ending Value of investment}{Beginning Value of investment}\right )^\frac{1}{n} -1$

Substituting we get ,            

Investment G

$RoR = \left (\frac{151000}{86000}\right )^\frac{1}{7} -1$

$RoR = 1.755813953^{0.142857143} -1$

$RoR = 1.083740989 -1 = 0.083740989$

RoR = 8.37%

Investment H

$RoR = \left (\frac{271000}{86000}\right )^\frac{1}{14} -1$

$RoR = 3.151162791^{0.071428571} -1$

$RoR = 1.085438096-1 = 0. 085438096$

RoR = 8.54%