You invest all the money you earned during your summer sales job (a total of $45,000) into the stock of a company that produces fat and carb-free Cheetos. The company stock is expected to earn a 14% annual return; however, 5 years later it is only worth $20,000. Turns out there wasn't as much demand for fat and carb-free Cheetos as you had hoped. What is the annual rate of return on your investment?

Question

Talon Hicks

Business

11 February, 07:36

You invest all the money you earned during your summer sales job (a total of $45,000) into the stock of a company that produces fat and carb-free Cheetos. The company stock is expected to earn a 14% annual return; however, 5 years later it is only worth $20,000. Turns out there wasn't as much demand for fat and carb-free Cheetos as you had hoped. What is the annual rate of return on your investment?

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Lucian · Answer 1

The annual rate of return of the invesment will be - 14,97%

Explanation:

The initial investment is 45.000 and after 5 years the value of the investment is only 20.000. Here we can see a destruction of value (20.000 < 45.000). In finance, the time takes an essential part in calculation, so through the interest rate we calculated how bad was the investment in annual terms. The formula is as follows: Final investment value = (Initial investment * (1+interest rate) ^ (total years)) in our case would be: 20.000 = (45.000 * (1+interest rate) ^ (5)) From this formula we got - 14,97%