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    Rate of return / PV and FV of annuity

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    (Rate of return) After graduation, Adrian moved across the country to Brownville and bought a small house for $208,000. Bill moved to Columbus and bought a house for $195,000. Four years later, they both sold their houses. Adrian netted $256,000 when she sold her house and Bill netted $168,000 on his.

    1. What annual rate of return did Adrian realize on her house?

    2. What annual rate of return did Bill realize on his house?

    (Calculating the PV and FV of an annuity) Assume an ordinary annuity of $500 at the end of each of the next three years.

    1. What is the present value discounted at 10%?

    2. What is the future value at the end of year 3 if cash flows can be invested at 10%?

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    Solution Preview

    Q 1.

    Use the compound interest formula to calculate the annual rate of return.

    The formula is
    FV = PV (1+rate)^n
    FV = final price
    PV = initial price
    rate = annual rate of return
    n = ...

    Solution Summary

    The solution explains the calculation of rate of return and PV and FV of annuity.