Question

Tim purchased a bounce house one year ago for $6,500. During the year it generated $4,000 in cash flow. If Time sells the bounce house today, he could receive $6,100 for it. What would be his rate of return under these conditions?

Answer 1

Answer:

Tim's rate of return under these conditions would be 55.38%.

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 55.38%.

Answer 2

Answer:

55.38%

Explanation:

Tim purchased a bounce house one year ago for $6,500

During the year it generated a cash flow of $4,000

If Tim sell the bounce house today, he would receive $6,100 for it

Therefore the rate of return under this condition can be calculated as follows.

= $6,100-$6,500+$4000/$6,500

= $3,600/$6,500

= 0.5538×100

= 55.38%

Hence the rate of return under this condition is 55.38%