Question

You're trying to choose between two different investments, both of which have up-front costs of $86,000. investment g returns $151,000 in 7 years. investment h returns $271,000 in 14 years. calculate the rate of return for each these investments.

Answer 1

Answer: The Rate of return earned by Investment G is 8.37%, while the rate of return earned by investment H is 8.54%.

We have

Investment G Investment H

Future Value of returns 151000 271000

No. of years 7 14

Costs 86000 86000

Rate of Return Formula :

`RoR = \left ((Ending Value of investment)/(Beginning Value of investment)\right )^(1)/(n) -1`

Substituting we get ,

Investment G

`RoR = \left ((151000)/(86000)\right )^(1)/(7) -1`

`RoR = 1.755813953^(0.142857143) -1`

`RoR = 1.083740989 -1 = 0.083740989`

RoR = 8.37%

Investment H

`RoR = \left ((271000)/(86000)\right )^(1)/(14) -1`

`RoR = 3.151162791^(0.071428571) -1`

`RoR = 1.085438096-1 = 0. 085438096`

RoR = 8.54%