Question

Someone offers to sell to you a financial contract that will pay $90 at the end of each year for the next five years, plus an additional $1000 at the end of the fifth year. If they will sell the contract for $900, what rate of return are they offering on the investment?

Answer 1

11.76%

Step-by-step explanation:

Present value of contract = $900

Annual return = $90

Additional sum = $1000

Formula:

PV of contract = annual return * PV annuity factor for 5 years at "x" rate + additional sum * PV factor for 5 years at x rate