Question

Five years ago, Brian had invested $14,850 in a growth fund. The investment is worth $22,000 today. If the interest was compounded annually, what is the annual rate of return earned on the investment?

Answer 1

Approximately 8.12%

Step-by-step explanation:

The annual rate of return is computed using the compounding formula below:

FV = P(1 + r)^n

Where FV = future value of investment

P = Principal

r = rate of interest per period

n = number of period

FV = $22,000

P = $14,850

r = Unknown

n = 5

22,000 = 14,850(1 + r)^5

22,000/ 14,850 = {14,850(1 + r)^5}/14,850

1.481481481 = (1 + r)^5

`\sqrt[5]{1.481481481 }` = (1 + r)

1.081780741 = 1+r

1.081780741 -1 = r

0.081780741 = r

Approximate 0.081780741 and convert to percentage

0.081780741 = 0.0812 *100% = 8.12%