Question

7. An investment costs $1,000 (CF at T = 0) and is expected to produce cash flows of $50 at the
end of each of the next 5 years, then an additional lump sum payment of $1,000 at the end of
the 5th year. What is the expected rate of return on this investment?
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5.0%
6.7%
7.1%
5.5%
5.9%

Answer 1

Answer:

5.0%

Explanation:

You can solve this using financial calculator .I'll be using (Texas Instruments BA II Plus)

Note; If using same calculator as mine, key in the number first then the function key.

Initial investment ; PV = -1000

Recurring payment ; PMT = 50

Duration of investment; N = 5

Future Value at the end of 5 years ; FV = 1000

Then CPT I/Y = 5%

Therefore, the expected rate of return on this investment would be 5%