Alex invested $100,000 ten years ago in Real Estate Income Trust(a type of mutual fund) and got the following income over that period: $6,700, $7,350, $8,595, $11,575, $8, 700, $9,340, $12,128, $11, 257, $10,250, $11, 560, annually. His investment is worth about $300,000 today. What is Alex average annual return on his investment over the 10-year period? Thank you for help.
There is no direct calculation that will give you the annual return for this type of investment. What you have to do is to guess a rate that will equate the PV of all the 10 payment plus the PV of the $300,000 to the purchase price of $100,000. For that purpose, you have to use this formula, or a bunch of them added together like this:
PV = FV / [1 + R]^1 + FV / [1 + R]^2 + FV / [1 + R]^3........FV / [1 + R]^10.
Through repeated iterations of R, you will eventually hone in on the actual rate of return. This is called "Cash Flow Analysis", and the rate you are looking for is called IRR, or "Internal Rate of Return". My computer has this programmed into it and can arrive at an answer almost instantaneously, once you enter all the above income payments plus the $300,000 into it. And it comes up with an annual return of 17.70% over the 10-year period of this investment.
