Question

What rate do you need to earn annually for an initial investment of a $1 to equal $10 if you are investing for only a five-year period? SHOW WORK, Explain thoroughly AND USE EXCEL Please and many Thanks. I want to learn this, but I am stuck on this one.

Answer 1

The annual rate to be earned can be found using the future value of investment equation

Future value = $ 10 ; Present value = $ 1 ; n = period = 5 years

Next we have to calculate the interest rate

(1 + interest rate)⁵ = ( $ 10 $1) = $ 10

1 + interest rate = 1.5849

Interest rate = (1.5849 - 1 ) * 100

Interest rate = 58.49%

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Excel calculation.

In excel we can use the rate function to calculate the interest rate.

In any cell enter = rate, the following below arguments are displayed

nper = 5 , pmt = 0 , pv = -1 , fv = 10

The value obtained = 58.49%