Hi!!
1. Calculating Rates of Return. You?re trying to choose between two different
investments, both of which have up-front costs of $40,000. Investment G returns
$70,000 in six years. Investment H returns $120,000 in 12 years. Which of these
investments has the higher return?
Recall the future value formula and definition:
"Future Value is the amount of money that an investment made today
(the present value) will grow to by some future date. Since money has
time value, we naturally expect the future value to be greater than
the present value. The difference between the two depends on the
number of compounding periods involved and the going interest rate.
The relationship between the future value and present value can be expressed as:
FV = PV (1 + i)^n
Where:
FV = Future Value
PV = Present Value
i = Interest Rate Per Period
n = Number of Compounding Periods "
"Future Value":
http://www.getobjects.com/Components/Finance/TVM/fv.html
From the FV formula we deduce the formula for i:
i = (FV / PV)^(1/n) - 1
- Investment G:
i = (70,000 / 40,000)^1/6 - 1 =
= 1.75^1/6 - 1 =
= 1.0978 - 1 =
= 0.0978
i_G = 9.78%
- Investment H:
i = (120,000 / 40,000)^1/12 - 1 =
= 3^1/12 - 1 =
= 1.0959 - 1 =
= 0.0959
i_H = 9.59%
Investment G has a higher rate of return.
Hope that this helps you. feel free to request for a clarification if you need it.
Regards.
livioflores-ga |
,
0 Comments
)