Calculate the average annual rate of return on an investment of $1000 that accumulates to $2005 in five years' time.
A)14.93%
B)8.8%
C)100.5%
D)17.63%

Question

Quizplus · Accepted Answer

The average annual rate of return can be calculated using the formula for compound interest: A = P(1 + r)^n, where A is the amount of money accumulated after n years, including interest, P is the principal amount (the initial amount of money), r is the annual interest rate, and n is the time the money is invested for in years. Rearranging the formula to solve for r gives us r = (A/P)^(1/n) - 1. Substituting the given values (A = $2005, P = $1000, n = 5 years) gives us r = ($2005/$1000)^(1/5) - 1 = 2.005^(1/5) - 1 ≈ 0.1493 or 14.93%.

Calculate the Average Annual Rate of Return on an Investment