Walmart wishes to determine the rate of return of an investment made four years ago for $25 000 and currently has a market value of $31 500. During the current year the investment generated cash flows of $1000.
Required:
What is the rate of return on the investment?
To calculate the rate of return on an investment, we need to know the initial investment amount, the ending value of the investment, and any cash flows generated by the investment during the holding period.
In this case, we have the following information:
- Initial Investment (P) = $25,000
- Ending Value (V) = $31,500
- Cash Flows (CF) = $1,000
The rate of return can be calculated using the following formula:
Rate of Return = [(V - P) + CF] / P
Substituting the given values:
Rate of Return = [(31,500 - 25,000) + 1,000] / 25,000
Simplifying the equation:
Rate of Return = 7,500 / 25,000
Rate of Return = 0.30 or 30%
Therefore, the rate of return on the investment made by Walmart is 30%.