In: Finance
If you were offered $15,000 fifteen years from now in return for an investment of $5,000 currently, what annual rate of interest would you earn if you took the offer?
Here,
Begining Value = $15,000
Ending Value = $5,000
Number of years = 15
The terms used in the formula
BV - Begining Value
EV - Ending Value
n - Number of years
\( \begin{align*}\rm\text{Compound Annual Growth Rate} &= \left ( \frac{EV}{BV} \right )^{\frac{1}{n}}-1\\ &= \left ( \frac{\$15,000}{\$5,000} \right )^{\frac{1}{15}}-1\\ &= 1.075989 – 1\\ &= 0.075989 \rm\text{ or } 7.60\%\end{align*} \)
The compounded annual growth rate is 7.60%
Annual rate of interest is 7.60%