Question

A small construction company has $100,000 set aside in a capital improvement fund to purchase new equipment. If $30,000 is invested at 30%, $20,000 at 25%, and the remaining $50,000 at 20% per year, what is the overall rate of return on the entire $100,000? using spreadsheet

Answer 1

We will increase each number (30,000; 20,000; 50,000) as per their percentages increase, then we will add them to find a sum of all increased number. The sum thus obtained will be compared with 100,000 (which is our initial sum of numbers 30,000 ; 20,000 and 50,000 without any percentage increase).

With this we will be able to find the percentage change in the overall sums which will give us overall return on the entire sum.

30% increase in 30,000 = (1+30%) * 30,000

= (1+ 0.30) * 30,000 = 1.3 * 30,000 = 39,000.

25% increase in 20,000 = (1+25%) * 20,000

= (1+0.25) * 20,000 = 1.25 * 20,000 = 25,000

20% increase in 50,000 = (1+20%) * 50,000

= (1+0.20) * 50,000 = 1.2 * 50,000 = 60,000.

Now we will sum the outputs obtained in the steps above:

39,000 + 25,000 + 60,000 = 124,000.

This result shall be compared with 100,000 to find the overall return.

Overall rate of return or percentage change = (Final Sum - Initial Sum ) / Initial Sum

= 124,000 - 100,000 / 100,000

= 24,000 / 100,000

= 0.24

= 24%.

Hence, the overall rate of return is 24%.