Question

In: Finance

XYZ owns two investments, A and B that have a combined total value of $54,000. Investment...

XYZ owns two investments, A and B that have a combined total value of $54,000. Investment A is expected to pay $31,000 in 2 years from today and has an expected turn of 7.60 percent per year. Investment B is expected to pay $44,000 in 5 years from today and has an expected turn of R per year. What is R, the expected annual return for investment B?

A. 12.32%

B. 13.85%

C. 11.80%

D. 10.08%

E. None of the above is within 0.2 percentage points of the correct answer

Solutions

Expert Solution

Option D

Value of cash flow today=future cash flow/(1+interest rate)^number of years

Hence, value of A=$31000/(1.076)^2=$26775.47

Hence Value of B today=Total value of A and B-value of A=$54000-26775.47=$27224.53

Value of B grows to $44000 in five years at an interest of R per year.

Hence, 27224.53(1+R)^5=44000

or, (1+R)^5=44000/27224.53

or, (1+R)^5=1.61618908

or, 1+R=(1.61618908)^(1/5)

or, 1+R=1.1007747

or, R=1.1007747-1

or, R=0.1007747

or, R=10.07747%

or, R=10.08%(approx.)


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