Question

Problem 7-31 Use a financial calculator or a program such as Excel to answer the questions. Round your answers to the nearest whole number. You purchase a stock for $12,000 and collect $450 at the end of each year in dividends. You sell the stock for $13,100 after three years. What was the annual return on your $12,000 investment? % You purchase a building for $850,000, collect annual rent (after expenses) of $135,000, and sell the building for $1,000,000 after five years. What is the annual return on this investment? % You buy a stock for $1,000 and expect to sell it for $930 after three years but also expect to collect dividends of $140 a year. Calculate the return on this investment and prove that it is less than 13 percent. %

Answer 1

Compute the annual return on each investment, using the equation as shown below:

DE Return on Investment 3 Particulars Investment 1 | Investment 2 | Investment 3 Investment amount 12000 850000 1000 5 Year 1 receipts 450 135000 140 Year 2 receipts 450 135000 140 Year 3 receipts 450 135000 140 8 Year 4 receipts 135000 O Year 5 receipts 135000 10 Salvage value 13100 1000000 930 11 12 Total Dollar return =SUM(C5:C10-C4 =SUM(D5:D10-D4 =SUM(E5:E10)-E4 13 Time period of investment (in years) 3 5 3 14 Return on investment =C12/(C4*С13) =D12/(D4*D13) =E12/(E4*E13) 0

The result of the above excel table is as follows:

Particulars 4 Investment amount 5 Year 1 receipts 6 Year 2 receipts 7 Year 3 receipts 8 Year 4 receipts Year 5 receipts 10 Salvage value C D | Ε Return on Investment Investment 1 Investment 2 Investment 3 $ 12,000 $850,000 $1,000 $ 450 $ 135,000 $ 140 $ 450 $ 135,000 $ 140 $ 450 $ 135,000 $ 140 $0 $ 135,000 $0 $0 $ 135,000 $0 $ 13,100 $ 1,000,000 $ 930 11 $ 2,450 $ 825,000 $ 350 12 Total Dollar return 13 Time period of investment (in years) || 14 15 Return on investment 7% 19% 12%

Hence, the return on investment for investment 1, 2 and 3 is 7%, 19%, and 12% respectively.