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Robyn LaFrance is considering an investment in a pecan grove costing $550,000. The projected annual income...

Robyn LaFrance is considering an investment in a pecan grove costing $550,000. The projected annual income is $90,000 for the next five years. She plans to sell the grove at the end of 5 years and estimates she will net $730,000 from the sale. Calculate (impute) the expected interest rate from this investment.

  • 24.39%

  • 20.70%

  • 248.42%

  • 18.96%

business   accounting   
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Answer #1

Let expected interest rate be x%

At this rate;present value of inflows=550,000

550,000=90,000/1.0x+90,000/1.0x^2+90,000/1.0x^3+90,000/1.0x^4+90,000/1.0x^5+730,000/1.0x^5

Hence x= expected interest rate=20.70%(Approx).

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