Here is a question for my accounting textbook: Ken is offered the possibility of investing $2,745 today and in return to receive $10,000 after 15 years. What is the annual rate of interest for this investment?
What steps do you use to figure out the annual interest rate?
2007-01-29 17:01:27 · 2 answers · asked by pilot23_99 1 in Business & Finance ➔ Investing
The person who answered above is wrong because you can't just figure out the overall return and then divide. In a deal like that, interest compounds. You need to take the present value formula:
FV = PV ( 1 + i )^t
Where
FV = the future value ($10,000)
PV = the initial investment ($2,745)
i = the interest rate (what you're solving for)
^t (the is an exponent!) = the number of periods (15, since the interest is annual)
Plug the numbers in and solve it like an algebraic equation:
10,000 = 2,745 (1+i)^15
I don't have a calculator handy, or I'd do it for you.. Good luck!
2007-02-02 16:51:28 · answer #1 · answered by Michelle 2 · 0⤊ 0⤋
Does he receive $10k total in 15 Years or $10k of interest (not including the initial investment known as the principle and would be 12,745 total)?
Assuming it's 10k total in 15 years, the formula is:
10,000 future proceeds -2745 initial payment = 7255 - total dollar gain in 15 years
7255 / 2745 = 2.642 - percentage gain over the whole life (264%)
264/15 years = 17.62% annual gain
2007-01-30 01:29:12 · answer #2 · answered by Brad S 2 · 0⤊ 1⤋