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You’re trying to choose between two different investments, both of which have up-front costs of $62,000. Investment G returns $122,000 in five years. Investment H returns $182,000 in 9 years. Calculate the rate of return for Investments G and H.

You’re trying to choose between two different investments, both of which have up-front costs of $62,000. Investment G returns $122,000 in five years. Investment H returns $182,000 in 9 years. Calculate the rate of return for Investments G and H.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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You’re trying to choose between two different investments, both of which have up-front costs of $62,000. Investment G returns $122,000 in five years. Investment H returns $182,000 in 9 years. Calculate the rate of return for Investments G and H.

Expert Solution
Step 1: Calculate rate of return for Investment G

Future value = $122,000

Period, n = 5 years 

Present value = $62,000 


Using the formula of time value of money, 

table row cell F u t u r e space v a l u e end cell equals cell P r e s e n t space v a l u e cross times left parenthesis 1 plus r right parenthesis to the power of n end cell row cell $ 122 comma 000 end cell equals cell $ 62 comma 000 cross times left parenthesis 1 plus r right parenthesis to the power of 5 space end cell row r equals cell open parentheses fraction numerator $ 122 comma 000 over denominator $ 62 comma 000 end fraction close parentheses to the power of 1 fifth end exponent minus 1 end cell row r equals cell 0.1450 space o r space 14.50 percent sign end cell end table


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