Washington-Pacific invests $2 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 15 years, at which time W-P plans to sell the forest at an expected price of $4 million. What is W-P's expected rate of return?
To calculate Washington-Pacific's expected rate of return, we need to consider the initial investment, future selling price, and the time it takes for the investment to mature.
The formula to calculate the expected rate of return is:
Expected Rate of Return = (Future Value - Initial Investment) / Initial Investment
In this case:
Initial Investment = $2 million
Future Value = $4 million
Time period = 15 years
Let's plug the values into the formula:
Expected Rate of Return = ($4 million - $2 million) / $2 million
Simplifying the calculation:
Expected Rate of Return = $2 million / $2 million
The calculation shows that the numerator and denominator are equal. To express it as a percentage, we can multiply the result by 100:
Expected Rate of Return = 1 * 100 = 100%
Therefore, Washington-Pacific's expected rate of return is 100%.