Youre trying to choose between two different investments bot

You’re trying to choose between two different investments, both of which have up-front costs of $25,000. Investment A returns $40,000 in six years. Investment B returns $60,000 in 11 years. Which of these investments has the higher rate of return?

Solution

Let rate of return be x%

At this rate;present value of inflows=present value of outflows.

A:

25000=40000/1.0x^6

1.0x^6=(40000/25000)

1.0x=(1.6)^(1/6)

1.0x=1.0815

x=(1.0815-1)

=8.15%(Approx)

B:

25000=60000/1.0x^11

1.0x^11=(60000/25000)

1.0x^11=2.4

1.0x=(2.4)^(1/11)

x=(1.0828-1)

=8.28%(Approx).

Hence B has the higher rate of return.