1. A company invests $1,000,000 at the beginning of the year. It adds another $2
ID: 2741507 • Letter: 1
Question
1. A company invests $1,000,000 at the beginning of the year. It adds another $250,000 at the end of the first quarter, withdraws $350,000 at the end of the second quarter, adds $145,000 at the end of the third quarter, and withdraws $450,000 of the remaining funds at the end of the year. It earns $20,000 of interest in the first quarter, $17,000 in the second quarter, $12,000 in the third quarter, and 29,000 in the fourth quarter. a. What is the annual effective rate earned on the investment portfolio b. What rate of return would have been calculated if one only looked at the ending portfolio value as compared with the beginning $1,000,000 investment?
Please show all calculations in an excel spreadsheet.
Explanation / Answer
Answer :-
a.) Interest 1000000 for 12 months (full year) = 1000000 * 12/12 = 1000000
Interest 250000 for 9 months = 250000 * 9/12 = 187500
Withdraw 350000 at the end of 2nd quarter = 350000 * 6/12 = 175000
Interest 145000 for 3 months = 145000 * 3/12 = 36250
Withdraw 450000 at the end of 4nd quarter = 450000 * 1/12 = 37500
TOTAL = 1000000 + 187500 + 175000 + 36250 + 37500
= 1011250
Interest for 1st quarter = 20000
Interest for 2nd quarter = 17000
Interest for 3rd quarter = 12000
Interest for 4th quarter = 29000
TOTAL = 78000
Annual Effective Rate = 78000 / 1011250
= 7.71 %
b.) Rate of Return = 29000 / 1000000
= 2.9 %
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