Calculating Annual Rate of Return on Investment

Understanding Investment Returns

Investing money involves analyzing the returns you receive on your investment. One way to measure the effectiveness of an investment is to calculate the annual rate of return.

Scenario Analysis

Imagine you lent $770 to your cousin as a gesture of goodwill. At the end of the year, your cousin returned $1,190 to you instead of the original loan amount of $770.

Calculating the Annual Rate of Return

If we view the repayment from your cousin as an investment, we can calculate the annual rate of return by using the formula:

Annual rate of return = ([Future Value] / [Present Value]) - 1

Plugging in the values in our scenario:

Annual rate of return = ($1,190 / $770) - 1

After performing the calculation, we find that the annual rate of return is 54.55%.

What is the annual rate of return for the investment in this scenario?

The annual rate of return in this scenario is 54.55%.