Rate of Return Calculation for Investment B

What is the rate of return for Investment B?

1. 39

2. 12

3. 48

4. 30

5. 35

6. 23

7. 16

8. 14

9. 26

Based on the data provided, what is the rate of return of Investment B after 4 years?

Rate of Return Calculation

The rate of return of the investment is calculated using the Profitability Index (PI) method. By calculating the total return on investment, and using the formula for PI, we come to the conclusion that the rate of return for the mentioned investment is approximately 26%.

The question revolves around the rate of return on an investment. In this case, we are analyzing Investment B over a span of 4 years with returns of $16000 in year 1, $15000 in year 2, $12000 in year 3, and $10000 in year 4. The total return over these 4 years is $54000.

To calculate the rate of return, we use the Profitability Index (PI), which is calculated as the ratio of benefits to costs. In this scenario, the PI is determined as ($54000 / $26500) = 2.04.

Next, to find the rate of return, we set the PI value as (1 + Rate of return)^n. So, 2.04 = (1 + r)^4. By solving this equation, we arrive at a rate of return of approximately 26%.

Therefore, the correct answer from the provided options for the rate of return of Investment B is 26. This signifies a positive return on the investment over the specified period of time, showcasing the potential profitability of Investment B.