A nightclub is purchased for $600,000. It makes an annual profit of $50,000.

Question

 Six years later, it is sold for $1,000,000. Calculate the total rate of return for this investment. (Hint: there are two components of this, which will need to be added together.)Round, if necessary, to the nearest 0.1%

Answer 1

 

Total profit over the 6 years = 6(50,000) = 300,000

 

Proceeds from the selling of the club = 1,000,000 - 600,000 = 400,000

 

So the total income from this investment = 400,000 + 300,000 = 700,000

 

We can use the simplest interest formula to find the rate of retirn

 

simplle interest formula is

 

    I = Prt      P = principal, r = rate, t = years

 

    700,000 = 600,000(r)(6)

    700,000 = 3,600,000r

               r = 700,000/3,600,000

               r = .19444

 

               r = 19.44%