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.