Sasha owns two investments, A and B, that have a combined total value of 42,000 dollars. Investment A is expected to pay 28,200 dollars in 1 year(s) from today and has an expected return of 12.25 percent per year. Investment B is expected to pay 21,431 in 2 years from today and has an expected return of R per year. What is R, the expected annual return for investment B? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.
We need to equate the present value of both the investments to the combined total value.
Present value =Future value/(1+Rate)^number of periods
Hence
42000 = 28200/(1+0.1225)^1 + 21431/ (1+R)^2
42000 = 25122.49+ 21431/ (1+R)^2
21431/ (1+R)^2 = 16877.51
(1+R)^2 = 1.269796648
1+R = (1.269796648)^(1/2)
1+R =1.126852541
R = 0.1269
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