Question

1. Find rate of return on your investment if P = $1000 and annual income = $71 for 25 years of your business.

Answer 1

ROR is the rate of interest at which Present worth of the cash flow is equal to 0.

let i = 4%

PW(4%) = -P + A(P/A, i, n)

                = -1000 + 71(P/A, 4%, 25)

                = -1000 + 71(15.6221)

                = 109.17

let i = 6%

PW(6%) = -P + A(P/A, i, n)

                = -1000 + 71(P/A, 6%, 25)

                = -1000 + 71(12.7834)

                = -92.38

By interpolation

i = 4% + [(109.17 - 0) / (109.17 - (-92.38)] * (6% - 4%)

= 0.04 + (109.17 / 201.55) * 0.02

= 0.04 + 0.0108

= 0.0508

= 5.08%

Thus, the rate of return on your investment is 5.08%