Question

You purchase a $1,000 asset for $800. It pays $60 a year for seven years at which time you receive the $1,000 principal. Prove that the annual return on this investment is not 9 percent.

Answer 1

Answer:

Please check explanations for answer

Explanation:

Here, we want to prove that the ROI is not 9 percent per annum

The amount spent buying the item is $800

Now, there is $60 payment per year for 7 years

The total amount received as the total of payment per year after the 7 years will be;

7 * 60 = $420

Now, instead of the $800 paid initially, $1000 was returned as the principal

What this mean is that there is an extra $200 gain including the $420 that was paid earlier

So the total amount of gain on the investment is $200 + $420 = $620

Now, we proceed to calculate the percentage this was, relative to the amount invested

That would be;

620/800 * 100%

= 77.5%

So there was a 77.5% ROI

so the yearly return on this will be;

77.5%/7 = 11.07 which is approximately 11%

So the ROI is 11% and not 9%