As a rule of thumb, 8% annualized net return over a minimum holding period of fi

Question

As a rule of thumb, 8% annualized net return over a minimum holding period of five years is a realistic figure. Pablo Picasso's 1905 portrait Boy with a Pipe sold for $104.2 million in an auction at Sotheby's Holdings, Inc., on June 24, 2004, shattering the existing record for art and ushering in a new era in pricing for 20th-century paintings. The Picasso, sold by the philanthropic Greentree Foundation, cost Mr. Whitney about $30, 000 in 1950. Determine the annual rate of appreciation of the artwork over 54 years. Is this a good investment?

Explanation / Answer

If annual rate of appreciation be R%, then

$30,000 x (1 + R)54 = $104,200,000

(1 + R)54 = $104,200,000 / $30,000 = 3,473.33

Taking 54th root on each side,

1 + R = 1.1630

R = 1.163 - 1 = 0.163, or 16.3%

Since this rate is higher than the required rate of 8%, this is a good investment.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.