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