Problema Solution
Georgia bought a house in 1998 for $220,000. In 2003 she sold the house and made a net profit of $50,000. Find the effective annual rate of return on her investment over the 5 year period.
Answer provided by our tutors
P = $220,000.00 is principal value
A = $220,000 + $50,000 = $270,000 is future value
t = 2003 - 1998 = 5 years is number of years
is the effective rate that we need to find
= (A/P)^(1/t) - 1
= (270,000/220,000)^(1/5) - 1
= 0.0418 or 4.18%
The effective annual rate of return on her investment over the 5 year period is 4.18% approximately.