An investor originally paid $22,000 for a vacant lot twelve years ago. If the investor is able to sell the lot today for $62,000, what would his annual rate of return be on this investment (rounded to the nearest percent) ?

a. 7%

b. 9%

c. 5%

d. 11%

b. 9%

Explanation:

Formula for annual rate of return formula is as follows;

Annual rate of return = [ (New value / Initial value) ^ (1/t) ] - 1

t = the total holding period of investment = 12 years

Old value = 22,000

New value = 62,000

Next, plug in the numbers to the formula;

Annual rate of return; r = [ (62,000/22,000) ^ (1/12) ] - 1

r = [2.8182 ^ (1/12) ] - 1

r = 1.0902 - 1

r = 0.0902 or 9%