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?

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:

Step 3

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

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