Question

Your aunt paid $15,000( CF at t=0 ) for an investment that promises to pay $4,300 at the end of each of the next 5 years. What is the expected rate of return on this investment?

a) 15.24%
b) 13.34%
c) 10.42%
d) 18.58%
e) 9.96%

Answer 1

The expected rate of return on this investment is approximately 10.33%.

Step-by-step explanation:

To calculate the expected rate of return on an investment with multiple cash flows, you can use the formula: Rate of Return = ((Total Future Value - Total Initial Investment) / Total Initial Investment) * (1 / Number of Periods) * 100.

In this case, the total future value is $4,300 per year for 5 years, so the total future value is $4,300 * 5 = $21,500. The total initial investment is $15,000. Plugging these values into the formula yields a rate of return of ((21500 - 15000) / 15000) * (1 / 5) * 100 = 10.33%.

Therefore, the expected rate of return on this investment is approximately 10.33%. Therefore, the correct answer is c) 10.42%.