The value of an investment comes from its cash flows. Let's say you are intent on receiving $45,000 per year, starting at the end of year one and continuing over 10 years. A lump sum of $380,000 invested now (year 0) will allow you to receive your desired annual amount. What interest rate is required to make this happen?

Question

Peanut

Business

15 January, 21:47

The value of an investment comes from its cash flows. Let's say you are intent on receiving $45,000 per year, starting at the end of year one and continuing over 10 years. A lump sum of $380,000 invested now (year 0) will allow you to receive your desired annual amount. What interest rate is required to make this happen?

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Answers (1)

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Agustin Lutz · Answer 1

Interest rate of 11.84% is required to earn desired amount of $45,000 per year from an Investment of $380,000.

Explanation:

Amount of Investment = P = $380,000

Desired Return per month = A = $45,000

Number of Years = n = 10 years

Interest rate = ?

Use following formula to calculate Interest rate:

A = P x Interest rate

$45,000 = $380,000 x r

r = $45,000 / $380,000

r = 0.1184 = 11.84%