f the value of Bob\'s retirement portfolio increased from $250,000 to $1,274,000
ID: 1141503 • Letter: F
Question
f the value of Bob's retirement portfolio increased from $250,000 to $1,274,000 over a 20 year period, with no additional deposits made over that period of time, what was his annual rate of return? Ideal Industries is considering the purchase of an annual maintenance contract for its heating and air conditioning systems. Since this will be a new system, the company plans to begin the contract at the end of year 4 and continue through year 10. The cost of this contract is $4,600 per year and the company's mini attractive rate of return is 10% per year. a. b. c. d. Draw the cash flow diagram described above. What will be the present worth of the contract? What will be the future worth of the contract? If the company wishes to pre-pay the contract with uniform payments in years one, two and three only, what will be the amount of each payment? What will be the equivalent uniform annual amount of the contract in years one through ten? e.Explanation / Answer
(Question 1)
If average annual rate of return be R%, then
$250,000 x (1 + R)20 = $1,274,000
(1 + R)20 = $1,274,000 / $250,000
(1 + R)20 = 5.096
Taking 20th root on each side,
1 + R = 1.0848
R = 0.0848
R = 8.48%
NOTE: As per Answering Policy, 1st question has been answered.
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