Someone offers to sell to you a financial contract that will pay $90 at the end of each year for the next five years, plus an additional $1000 at the end of the fifth year

Finance Oct 07, 2020

Someone offers to sell to you a financial contract that will pay $90 at the end of each year for the next five years, plus an additional $1000 at the end of the fifth year. If they will sell the contract for $900, what rate of return are they offering on the investment?

Expert Solution

Computation of Rate of Return using Rate Function in Excel:

=rate(nper,pmt,-pv,fv)

Here,

Rate = Rate of Return = ?

Nper = 5 years

PMT = $90

PV = $900

FV = $1,000

Substituting the values in formula:

=rate(5,90,-900,1000)

Rate or Rate of Return = 11.76%

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