Answer:
Tim's rate of return under these conditions would be <u>55.38%</u>.
Explanation:
Rate of return refers to the income realized or to be realized from an investment expressed as a proportion of the cost of that investment.
For Time, his rate of return can be calculated using the rate of return formula as follows:
Rate of return = Net return / Purchase price .................... (1)
Where;
Rate of return = ?
Net return = Total realizable amount - Purchase price .......... (2)
Purchase price = $6,500
Total realizable amount = Cash flow generated + Amount to realize if sold = $4,000 + $6,100 = $10,100
Substitute the relevant values into equation (2), we have:
Net return = $10,100 - $6,500 = $3,600
Substitute the relevant values into equation (1), we have:
Rate of return = $3,600 / $6,100 = 0.5538, or 55.38%
Therefore, his rate of return under these conditions would be <u>55.38%</u>.
