Question

1. The following is the stream of net cash flows into an investment account: $1000 is invested at the beginning of the first month, $50 is invested at the end of the same month, $45 is invested at the end of the second month, $250 is withdrawn at the end of the third month, $55 is invested at the end of the fourth month, and $100 is withdrawn at the end of the fifth month. When the account was closed at the end of the sixth month it was worth $1,025.37.

What is the average monthly rate of return that this investment generated over the past 6-month period?

Answer 1

Month	Opening Balance	PMT	Interest	Closing Balance
0		$1,000.00		$1,000.00
1	$1,000.00	$50.00	$36.00	$1,086.00
2	$1,086.00	$45.00	$39.10	$1,170.10
3	$1,170.10	$-250.00	$42.13	$962.23
4	$962.23	$55.00	$34.64	$1,051.87
5	$1,051.87	$-100.00	$37.87	$989.74
6	$989.74		$35.63	$1,025.37

• Opening balance = previous year's closing balance
• Closing balance = Opening balance+PMT+Interest
• Interest = 43.20%/12 x opening balance
• Withdrawals are mentioned as negative values
• We used Excel's goal seek function to arrive at the annualized rate that will result in the desired closing balance. So the annual rate came as 43.20%, rounded to 2 decimal places
• Monthly return would be 43.20/12 = 3.6%