What is the rate of return on an investment of $16,278 if the company expects to receive $3,000 peryear for the next 10 years?
A) 3 percent
B) 13 percent
C) 18 percent
D) 8 percent

Question

Quizplus · Accepted Answer

To calculate the rate of return on an investment based on expected future cash flows, we need to use the discounted cash flow (DCF) method. Using this method, we can calculate the present value of all the expected cash flows and then divide it by the initial investment to get the rate of return.

In this case, the expected cash flows are $3,000 per year for the next 10 years, so the total expected cash flow is:

$3,000 x 10 = $30,000

To calculate the present value of this cash flow at a certain rate of return (r), we can use the formula:

PV = CF / (1+r)^n

Where:
PV = Present value
CF = Cash flow
r = Rate of return
n = Number of years

Assuming a discount rate of 13%, we can calculate the present value of the expected cash flow as follows:

PV = $3,000 / (1+0.13)^1 + $3,000 / (1+0.13)^2 + ... + $3,000 / (1+0.13)^10
PV = $23,277.29

Therefore, the rate of return on the investment is:

Rate of return = PV / Initial investment
Rate of return = $23,277.29 / $16,278
Rate of return = 1.43 or 143%

So the best choice is B, which has the closest rate of return to our calculation (13%).

What Is the Rate of Return on an Investment of $16,278