Question

You purchase a farm for $1,000,000 in cash. A local farmer rents the land to grow wheat and this pays your real estate taxes and insurance. After five years you can sell for $2,000,000. If inflation is 3% per year, what is your real rate of return on the investment

Answer 1

You get a return rate of 162.06%

Step-by-step explanation:

You start off with 1 mil in profit, but you must then add the inflation rate. It says inflation increases by 3% each year, so you cannot just take 15% of it but rather take away 3% the first year, increase it to 6% the next year, 9% the third year, 12% the fourth year, and 15% the last year.

for example, 1,000,000 * .97 = 970,000

then take 970,000 and multiply by .94 to get 911,800.

Then, continue until you get to .85 to get:

620,644.024. Because you want to find how much you made, you put 1,620,644.024 and divide by the original amount 1,000,000 to get approximately 162.06%.