FINANCE Ch 5 Time Value of Money KQuestion 2 (of 5) 5.00 points Although appeali

Question

FINANCE Ch 5 Time Value of Money KQuestion 2 (of 5) 5.00 points Although appealing to more refined tastes, art as a collectible has not always performed so profitably During 2003 an auction house sold a sculpture at auction for a price of $10,241,500 Unfortunately for the previous owner, he had purchased it in 2000 at a price of $12 237,500 should be indicated by a minus What was his annual rate of return on this sculpture? (Negative amount sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g. 32.16) Annual rate of return Hints References eBook & Resources

Explanation / Answer

We can use either both Future Value or the Present Value formula. We will use the FV formula,

FV = PV(1 + r)t

Solving for r, we get

r = (FV / PV)1/t - 1

r = ($10,241,500 / $12,237,500)1/3 - 1

r = - 5.76%

Notice that the interest rate is negative. This occurs when the FV is less than the PV

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