Question

4. You are considering buying a painting by a local artist for $1,200. You believe that this artist is just about to be discovered and think that eight years from now the painting will be worth $7,500. If you are correct, what average annual return (%) would you earn on this investment over this period?

Answer 1

FV = PV * (1 + r)^n

We need to find r, given

FV = 7,500

PV = 1,200

n = 8

7,500 = 1,200 * (1 + r)^8

(1 + r)^8 = 7,500/1,200

(1 + r)^8 = 6.25

1 + r = 6.25^(1/8)

1 + r = 1.2574334297

r = 1.2574334297 - 1

r = 0.2574334297

r = 25.74334297%

The average annual return you would earn is 25.74334297%

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