1 answer

The following is the stream of net cash flows into an investment account: $1000 is invested...

Question:

  1. The following is the stream of net cash flows into an investment account: $1000 is invested at the beginning of the first month, $50 is invested at the end of the same month, $45 is invested at the end of the second month, $250 is withdrawn at the end of the third month, $55 is invested at the end of the fourth month, and $100 is withdrawn at the end of the fifth month. When the account was closed at the end of the sixth month it was worth $1,025.37.

What is the average monthly rate of return that this investment generated over the past 6-month period?


Answers

Month Opening Balance PMT Interest Closing Balance
0 $1,000.00 $1,000.00
1 $1,000.00 $50.00 $36.00 $1,086.00
2 $1,086.00 $45.00 $39.10 $1,170.10
3 $1,170.10 $-250.00 $42.13 $962.23
4 $962.23 $55.00 $34.64 $1,051.87
5 $1,051.87 $-100.00 $37.87 $989.74
6 $989.74 $35.63 $1,025.37
  • Opening balance = previous year's closing balance
  • Closing balance = Opening balance+PMT+Interest
  • Interest = 43.20%/12 x opening balance
  • Withdrawals are mentioned as negative values
  • We used Excel's goal seek function to arrive at the annualized rate that will result in the desired closing balance. So the annual rate came as 43.20%, rounded to 2 decimal places
  • Monthly return would be 43.20/12 = 3.6%
.

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