In: Finance
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
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.)