How to calculate a simple rate of return

[bobbo7410]

I'm reading an example in the book, and I simply can't wrap my mind around it...

It's claiming you invest $1000 and get back $150 per year for 5 years. At the end of 5 years the salvage value is $1000 (if that matters).

It claims the Rate of Return is 15%, yet for the life of me I can't figure out where they got that 15%...

 

[JonF]

They mean 15% a year, not overall.

 

[bobbo7410]

They mean 15% a year, not overall.

I thought that originally... yet the next one shows investing $2000, and $150 year for 6 years (salvage value of 2700). The rate of return is shown at 11.8%, which throws off my initial logic... hence my confusion.

I'm not sure how to implement the salvage value, etc.

 

[CRGreathouse]

I thought that originally... yet the next one shows investing $2000, and $150 year for 6 years (salvage value of 2700). The rate of return is shown at 11.8%, which throws off my initial logic... hence my confusion.

You get 7.5% per year, but you also turn $2000 into $2700 over 6 years, which is itself something like a 5% yearly return.

 

[CellCoree]

Calculating a simple rate of return is a useful tool for evaluating the success of an investment. The formula for calculating this rate is (gain from investment - cost of investment) / cost of investment. In this example, the gain from the investment is the total amount received after 5 years, which is $750 ($150 per year for 5 years). The cost of the investment is $1000.

Using the formula, we can calculate the rate of return as follows:
($750 - $1000) / $1000 = -0.25 or -25%

However, the book may have used a different formula to calculate the rate of return. It is possible that they took the total gain from the investment ($750) and divided it by the initial investment ($1000) to get a rate of return of 0.75 or 75%. This is known as the average annual rate of return.

It is important to note that there are different ways to calculate a rate of return and it is important to understand which method is being used in order to interpret the results accurately. Additionally, the salvage value of $1000 at the end of 5 years may have affected the calculation in some way, but without more context it is difficult to determine its impact on the rate of return.

I would recommend reviewing the formula used in the book and understanding the assumptions and variables involved in the calculation. It may also be helpful to seek clarification from the author or a knowledgeable source to better understand the concept. As a scientist, it is important to critically evaluate and understand the methods and results presented in any source.