Chapter 7A, Problem 1P

To determine

The rate of return.

Answer to Problem 1P

The rate of return is 7.46%.

Explanation of Solution

Given information:

Year	Cash Flow
0	-$1000
1	3400
2	-5700
3	3800

The formula for $\text{Rate of return = }\frac{\text{Net gain from investment}}{\text{InvestmentCost}}\times 100$

$\begin{array}{l}\text{Cashoutflow}=\$1000+\$5700\\ =\$6700\end{array}$

$\begin{array}{l}\text{Cash inflow}=\$3400+\$3800\\ =\$7200\end{array}$ $\begin{array}{l}\text{Gain=Cashinflow-Cashoutflow}\\ =\$7200-\$6700\\ =\$500\end{array}$

$\text{Rate of return}=\frac{\$500}{\begin{array}{l}\$6700\\ =7.46\%\end{array}}\times 100$.

Conclusion:

The rate of return is 7.46%.