menu
bartleby
search
close search
Hit Return to see all results

Your father paid $10,000 (cf occurs at t=0) for an investment that promises to pay $850 at the end of each of the next 5 years, then an additional lump sum payment of $12,000 at the end of the 5th year. What is the expected rate of return on this investment?

Question

Your father paid $10,000 (cf occurs at t=0) for an investment that promises to pay $850 at the end of each of the next 5 years, then an additional lump sum payment of $12,000 at the end of the 5th year. What is the expected rate of return on this investment?

check_circleAnswer
Step 1

Expected rate of return can be described as the total profit or loss on a particular investment over a set period of time. Expected rate of return is generally stated as a percentage in relation to primary cost of investment.

It is given that,

Initial cash outflow is $10,000.

Annual cash inflow is $850.

Cash inflow at the end of year 5 is $12,000.

Step 2

The formula to calculate present value will be helpful to calculate the expected interest rate.

The below expression can be used to calculate expected interest rate:

C
C
C
C FC
PV
3
5
(1+) (1+(+ (1+i)4(1+ij
Here,
PV is present value
C is cash inflow
FC is final cash inflow.
help_outline

Image Transcriptionclose

C C C C FC PV 3 5 (1+) (1+(+ (1+i)4(1+ij Here, PV is present value C is cash inflow FC is final cash inflow.

fullscreen
Step 3

Substitute $850 for C and $12,000 for ...

12,850
4
850
850
850
850
PV =
2
3
(1+)(1+i)°
(1+) (+)(1+/)
help_outline

Image Transcriptionclose

12,850 4 850 850 850 850 PV = 2 3 (1+)(1+i)° (1+) (+)(1+/)

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Our solutions are written by experts, many with advanced degrees, and available 24/7

See Solution
Tagged in

Business

Finance

Related Finance Q&A

Find answers to questions asked by student like you

Show more Q&A add
question_answer

Q: On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semian...

A: Calculation of Amount of Bond Discount:The bond premium is $10,087 for six months. The bond premium ...

question_answer

Q: Multinational corporations are exposed to higher risks that primarily come from two significant sour...

A: Expropriation is the act in which taking  over of privately owned property by the government.While, ...

question_answer

Q: ackis planning for his son's college education to begin eightyears from today. He estimates the year...

A: First we need to calculate the present value of an ordinary annuity in year 7 as the withdrawal star...

question_answer

Q: 2. What are the free cash flows that are relevant to analyzing the two projects? Compute the NPVs of...

A: Free cashflow is calculated using formula:FCFF = EBIT - Taxes + Depreciation - Capex - Change in NWC...

question_answer

Q: Upton Umbrellas has a cost of equity of 12.6 percent, the YTM on the company's bonds is 5.7 percent,...

A: Calculating the market value of debt and equity. We have,(a) Market value of debt = Book value of de...

question_answer

Q: You borrowed $700 at 5% compounded quarterly. Yourpayments are $150 at the end of each year. How man...

A: We will adopt the following approach:It's a typical time value of money case, where we have to find ...

question_answer

Q: Someone receives an IRS notice regarding a math error, what does that mean? Is there any advice or s...

A: Under Sec. 6213(g) (2), math errors include:An error due to addition, subtraction, multiplication, o...

question_answer

Q: To save money for a new house, you want to begin contributing money to a brokerage account.  Your pl...

A: Calculation of value in brokerage account in nine years:Firstly, convert 9% return into quarterly co...

question_answer

Q: Roundtree Software is going public using an auction IPO. The firm has received the following bids: N...

A: First lets; understand what the winning auction offer price is. It is this price at and above which,...

Sorry about that. What wasn’t helpful?