Question

The cost of capital for a new project is $50,600. The project is expected to yield $20,000 in year one and
two. What is the approximate rate of return over this period?
5.4%
10.8%
2.7%
7.4%

Answer 1

Answer:

-20.9%

Explanation:

To calculate the approximate rate of return for the project over the two-year period, we can use the formula for rate of return (RoR):

$RoR=(\frac{Total revenue-Total Cost}{Total cost} )*100%$

Given:

Total cost of the project = $50,600

Total revenue from the project over 2 years = $20,000 + $20,000 = $40,000

Now, substitute these values into the formula:

$RoR=(\frac{40,000-50,600}{50,600} )*100%$

$RoR=(\frac{-10,600}{50,600} )*100%$

$RoR=-0.209*100%$

$RoR=-20.9%$

Since the calculated rate of return is negative, it indicates a loss on the project rather than a return. Therefore, none of the provided options (5.4%, 10.8%, 2.7%, 7.4%) are correct for this scenario.

So, the approximate rate of return for the project over this two-year period is approximately -20.9%.