Calculating Rate of Return

Course: Investment Planning
Lesson 1: Key Principles of Investing

Student Question:

Hey Dan,

Hope you are doing well. Can you help solve a practice question?  I looked through the textbook and my notes, and just couldn’t wrap my brain about how to solve the problem below. 

The confusing part to me is that the fund was not sold, so there is no sales price, it just has a value after 10 years, and I am unsure of how to include that in the equation, if at all. I guessed 1.05% and was wrong, so I am assuming it is 1.19%, I just don’t know how to get the answer. Any advice would be greatly appreciated. Thank you.

The keystrokes I “attempted” that made sense to me are below. I have the 12C for reference.

f clx

g8

10,000 CHS g CFo

2,000 CHS g CFj

9 g Nj

f IRR

QUESTION:

Joe invested $10,000 in a mutual fund 10 years ago. Twelve months later, he invested an additional $2,000 in the fund and has done the same every year since. The fund is now worth $32,353. What is Joe’s IRR?

Thank you

Scott


Instructor Response:

Hi Scott,

Happy to help.  So it looks like you complicated this one.  It’s actually a simple interest calculation, disguised as a cash flow calculation.  Because the $2,000 contributions are annual and even, we can just enter them as a normal PMT entry.

The entries would be:

PV: -10,000

FV: 32,353

PMT: -2,000

n: 10

Solve for interest.  That should give you 1.19%.

Let me know if you have any trouble getting the same answer.

Dan