I have a math question that is killing me!
Its attached as an image
http://i782.photobucket.com/albums/yy109/cjlewis43/Screenshot2010-07-21at84404PM.png?t=1279766921
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M$5 Answers
one can't calculate the annual return rate with the given information.
reason: annual return is the profit or loss you make in a period of one year. one can't predict the progress of business. for example the business may have runs in loss in 1988 and profits in 1989.
to solve this problem i am making an assumption that in every year the annual return is same. (when data is insufficient, assumption is only way to tackle a problem)
starting of business value is $550 and the end is $750.
step 1: $750,000-$550,000 = $200 , annual return deals only with profit or loss of a year and not the over value. by sustracting we get profit of business in period of 5 years.
step 2: we have assumed that each year the annual rate is same now divide 200 by 5.
200/5=50
step 3: annual return= $50, 000
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M$the business increased $200,000 in 5 years
n=5
please remind me with the law of annual rate of return
i can't get it :(
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M$You can leave an optional "tip" with Mahalo's virtual currency, Mahalo Dollars. If you are asking a difficult question that might require some research, or if you'd like a wide variety of feedback, a higher tip often leads to more answers to your question.
M$http://www.zenwealth.com/BusinessFinanceOnline/TVM/TVMCalculator.html
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M$
Bklynjs, we are sorry that you went away, what happened did your ten year old read your post and explain the math to you. Never let education get in the way of learning. Here is a recent post in business week that refers to 7% long-term growth rate,when each year earns a different amount. I thing that you said was impossible. ~~~
"We can see how Coke stands to double system revenues by 2020, a feat that implies at least a 7 percent revenue long-term growth rate,"... pro-forma earnings per share (EPS) estimates of $3.80 for 2011 and $4.26 for 2012.
Source:
http://www.businessweek.com/investor/content/oct2010/pi2010106_567345.htm
You are annualizing a return that cannot be compared in that way. You have to annualize it over the five year period as there was no annual return. There was a business bought and sold. There was no annual increase as you show due to maybe in the second year the business did bad and was only worth $300,000 and then made up for it in it's 3rd and 4th year. This is not a compunded annual return but a straight return on a sale. The same would be true if you bought stock and held it for five years you can't count the ups and downs only the final return.
“Everything has its limit - iron ore cannot be educated into gold” ~
Mark Twain
What Does Annual Return Mean?
The return an investment provides over a period of time, expressed as a time-weighted annual percentage. Sources of returns can include dividends, returns of capital and capital appreciation. The rate of annual return is measured against the initial amount of the investment and represents a geometric mean rather than a simple arithmetic mean.
Annual return is the de facto method for comparing the performance of investments with liquidity, which includes stocks, bonds, funds, commodities, and some types of derivatives.
See above: How to find the Annual Return on your investments ...
The question asks for the “annual rate of return.” This is investing, we are not concerned with one countries petty way of figuring tax. If you start with $550,000.00 and sell it after five years, and receive $750,000.00 back. Then the annual rate of return, which is what he asked for, is 6.4% annually.
$550,000.00 at 6.4% for five years is $750,014.66
If you invest in something that will pay you 6.4% for five periods you will get $750,014.66 if you start with $550.000.00. It will always come out the same. The funds grew at a rate of 6.4%.
You are going on and on and on. There is no compounding of interest in this transaction. It is a straight out purchase and sale. In your other question you specifically asked someone to compund interest at a certain rate. That is not the question being asked here. You now show the formula for calculating interest. I don't know how many ways to say this-this is not a compound interest question as my example clearly shows with the business ups and downs. A businees consists of a building, equipment, inventory these are all fixed assets. There is no return on this investment until the sale of the business and therefore no compounding of interest. If the business was only worth $400,000 at one point in time then if you sold then you lost money there is not a compounding to the next level.
No one said anything about selling share certificates the question read the business was sold. This again is one of your read in tangents.
Thepoint of profit was an explanation of why you hold a business.
This is as far as I go THERE IS NO COMPOUNDING OF INTEREST in this example.
You can't seem to understand this and as I have said previously learn some Accounting and the way this is done. I have been doing it for years buying and selling buildings.
BYE!
Once again you are compounding interest on the sale of a fixed asset. For some reason you just don't seem to understand that there is no return until the asset is sold. For some reason my example for you came out on the above post it may explain it to you so you understand. And once again you are off on a tangent this has nothing to do with figuring tax it is the correct way to average the ROR on a fixed asset. I don't know where you read taxes into this. And this is the USA not some petty Country I'm from so learn the law. It applies to investing. It looks like your just trying to save face with all your ETF's and taxes, they have nothing to do with the question. And this is the way all developed Countries would do this as an investment. As previously stated pick up a book to learn instead of making moot points.
Once again you are comparing apples to oranges and by Twain's quote you will never learn until you pick up a book and realize there is no compound interest on fixed assets. So why do yoou constantly talk about stocks and bonds. This is not an investment this is a business you bought, operated for five years and sold.
So in another quote: Never try to teach a pig to sing it not only annoys the pig but it wastes my time.
Walk through
$550,000.00 at 6.4% = $585,200.00
$585,200.00 at 6.4% = $622,652.80
$622,652.80 at 6.4% = $662,501.73
$662,501.73 at 6.4% = $704,901.06
$704,901.06 at 6.4% = $750,014.66
If we buy shares in a security for $1,000.00 and we hold it for 30 years and at the end it is worth over a million dollars like MacDonald’s stock did. We all agree that it increased about 26% a year, for those 30 years. How is that different than this high school math question?
There is nothing in here about interest, there is nothing about a fixed asset, or whatever you called it. There was just capital growing at 26% annual rate of return, from point A to point B, like this math question.
We have this question up in another place and the answerer came up with the exact same numbers. How can that be?
See: http://www.porschequestions.com/if-you-invest-550-000-00-and-it-grows-at-6-4-per-year-how-much-will-you-have-in-five-years
Source:
http://www.zenwealth.com/BusinessFinanceOnline/TVM/TVMCalcWindow.html
I don't know if your Owls friend or what? But there is no compound interest on the purchase and sale of a fixed asset. I will not continue this argument with you. As you can see from my example above with the ups and downs of the business there is no consistant annual return. Tell me what University your Accounting Degree is from. Mine is from FDU and I have a degree in Investment property from NYU. There can never be a consistant annual return as in compounded interest as the business has different values each year. THIS IS NOT A COMPOUND INTEREST QUESTION! Your own link clearly states as it ends than the compounding of interest will not be used. Read what you post all the way through and just don't skim the first few sentences. You have defeated your own post by yourself and this is now moot.
The question said a business, a business is a fixed asset. That is just basically understood in any Country. So the question said a busineess was purchased meaning a fixed asset was purchased.
And the question in another place does not say you bought and sold a business. It asks if $550,000 is compounded at 6.4% how much will you have in five years. This is a completely different question as you give a dollar amount and an interest rate. Even your answerer says it depends on how often it is compounded and the question is unclear. You have asked there about a specific dollar amount and have given an interest rate. This question asks about a business bought and sold so there is no ROR on the business until it is sold. You are trying to play word games now with this answer. You are taking profit out of sales in the interim. And when the business is SOLD you get your RETURN. Really please don't go off on anymore unrelated tangents. These were two totally different questions with two totally different meanings.
A business consists of a building, machinery and equipment these are fixed assets. There are also office equipment such as desk, file cabinets and even a telephone system these are fixed assets.
By your own definition your answer is wrong. You state that you have to include all activity with the investment. So this would include profit and loss and legal fees for buying and selling the business. Possibly a brokers fee. So your answer by your definition should have been there is not enough info' to answer this question. You have repeatedly stated all activity must be included should have brought you here.
Mr.bklynjs, please check out the link: http://www.investorwords.com/222/annual_return.html
and LEARN THE DEFINITION OF ANNUAL RETURN.
Now stop arguing and understand that you hav mistaken.Misakes happen to all humans.Its ok man.But what OWLS said is 100% correct according to my view.Host,please do cansider the definition of ANNUAL RETURN.
What makes you think it is a fixed asset?
Look I never said anything about interest.
bklynjs > “The question said a business, a business is a fixed asset.”
A business (also known as a company, enterprise, and firm) is a legally recognized organization designed to provide goods or services, or both...
http://en.wikipedia.org/wiki/Business
A Fixed asset on the other hand, is also known as a non-current asset or as property, plant, and equipment (PP&E), is a term used in accounting for assets and property, which cannot easily be converted into cash.
http://en.wikipedia.org/wiki/Fixed_asset
bklynjs > So the question said a business was purchased meaning a fixed asset was purchased.
In an Investing business, liquidity is important, everything can easily be converted into cash at any time. There is nothing in either definition that suggests that a business is a fixed asset that cannot be easily converted into cash.
In an investment we look for three things. We want to be able to sell what we bought for more than we paid for it. We want to have some sort of income, to at least cover holding the asset. And we want to be pretty sure that we can get the original capital that we put into it, out at any time without a severe penalty by selling it on the open market.
bklynjs > And the question in another place does not say you bought and sold a business. It asks if $550,000 is compounded at 6.4% how much will you have in five years.
It is the same math problem. We were solving for annual rate of return, which averaged 6.4% per year, to go from $550,000.00 to $750,000.00 in five years. Call it anything that you like. It was not 6%, and it was not 7%.
bklynjs > There is no ROR on the business until it is sold.
You do not have to sell share certificates in a business to get the value out of them. They can be used as collateral, or even margin. That will not change the growth rate of the capital from 6.4% in this example.
bklynjs > You are taking profit out of sales in the interim.
Nobody said anything about profits. What are the profits of holding a business for five years, in one of 150 different countries?
In finance or accounting, profit is the increase in wealth that an investor realizes from making an investment, taking into consideration all costs...
http://en.wikipedia.org/wiki/Profit_(economics)
Calculating profits depends knowing all of your true costs, there is no mention of the costs that it took to get that 6.4% return on the original capital. So there is no way to know the profit.
If as you hinted at in a previous post somewhere were driving down to a bank to put it in to earn bank interest. The cost of your driving the car, gasoline, and ten cents an hour to you, would need to be subtracted from the total to get the net profit.
This question looked more like capital gain to me. Selling it for more than you paid for it. Nothing about income, or expenses.
When we invest, we compare past and future possibilities, forward, and backwards using the time value of money. We have to know if the expected annual rate of return meets out goals, before we fund the business, or we move our funds someplace else.
If we suspected that when we bought the business at $550,000.00. That five years later we would be able to liquidate it at $750,000.00. Then if we needed a return of 7%, we would not buy the business. If we needed a return of 6% to meet our goals, we would have been able to pay a little more than $550,000.00 when we bought the business.
We have to know this on every investment, and every investment alternative, every time we make a trade.
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M$
You are once again comparing apples and oranges. Porshce is a Corp. with millions of shares out that is traded on a stock exchange. A business that sold for $750,000 does not have thousands of shares out to multiple stockholders. And no one would pay $750,000 for some streetwalkers business so again this is moot.
The market making 11% has nothing to do with the profit and loss of a business but is recognized by the owner of a business that is small enough to sell for $750,000. And the queston of whether or not this is the total value of the business you are now reading in all kinds of little quirks to suit your needs. The question simply stated that the business was sold for $750,000.
And yes I have heard of GM and all the other Co.'s you mentioned. You are confusing when they said the Co was worthless with the stock and the assets. When they said GM was now worthless they were talking about the stock not the residual value of the asstes they hold which is far from worthless. You can't seem to seperate the stock issue from the business issue. And your still with the compound interest. Nowhere did the question say anything about stock being traded it said a business was sold.
As far as paper Co.'s operating without assets yes they do and they are worthless to trade as the person running them is usually the business.
Your Actor, consultant and lecturer cannot transfer his abilities into a sellable business. So maybe you can go back to that elementary school book that you keep coming up with these assanine ideas to fit your profile.
And once again you are wrong a Bank does have assets. The building it operates out of and if it doesn't own it a lease is a fixed asset. It also owns computers, desks, chairs, the operating equipment that it has at the tellers windows. It owns a huge safe and lockboxes. It owns copiers and the equipment used to run the business. So please stop coming up with all this BS as it doesn't float. As stated all along THIS IS NOT A COMPOUND INTEREST QUESTION! I am done I am tired of reading BS that doesn't have anything to do with the question but maybe you can come up with somemore complications for such a simple deal. And instead of posting nonsense please spend some time taking classes in Finance, it might help you to understand. Leave your elementary school book at home.
If you have $550,000.00 working at 7.27%, in five periods you will have $781,185.35 instead of $750,000.00
The annual rate of return for this investment is 6.4%
The money is not working in five periods it is working in one. There is no compounding of interest here it is a possesion bought and sold. Your $781,000 is an annualized return this is not that type of investment. You have to take your profit and then annualize it only for comparative purposes. If you wanted to annualize it you would have to find what the business was worth each year and this would give you an annualized fact rate. Same as if you were holding equities.
I just don't know why you can't get it through your head there is no compounded inerest here. So...
Business bought in 1997 for $550, 000 and stays even at the end of year one-same value.
1998 business loses money and is in the red at the end of year 2-value $500,000.
1999 busines loses more money and at the end of year 3 is now worth $400,000
2000 business picks back up and at end of year four is worth $550,000
2001 business soars and you decide to sell at EOY and get $750,000 in 2002.
So now where is your compound interest? This is not a steady flow as in your example of 6.4% a year compounded annually. When selling a fixed asset you take your profit and divide by number of years to do averaging. This is basic Accounting. I buy and sell apartment buildings for a living and do this all the time. As stated please do some research into Accounting Laws before you compound interest on the sale of a fixed asset. You can repeat your wrong numbers as much as you like but learn some accounting and then you will understand.
If you took the $200,000.00 five year profit, and divided it by five. The first year we would earn about 7.2%. $40,000 on $550,000.00.
But the next year you would start with $550,000.00+$40,000.00 for a total of $590,000.00. If you only earned $40,000.00 on that it would be only 6.7%.
Your investment would have peaked the first year and be yielding less and less, each year. Not a good thing.
As a comparison, if $550,000.00 had been invested in a New York Stock Exchange traded Fund invested in China, like "Templeton Dragon Fund, (TDF), it would now be worth closer to $800,000.00.
https://www.sharebuilder.com/sharebuilder/Research/Tools/WhatIfIdInvested.aspx
Investopedia explains Annual Return
An investor .. purchases a stock business on January 1, 2000, for $20. The investor then sells it on January 1, 2005, for $35 – a $15 profit. The investor also received a total of $2 in dividends over the five-year holding period. In this example, the investor’s total return over five years would be $17, or (17/20) 85% of the initial investment. The annual return required to achieve 85% over five years follows the formula for the compound annual growth rate.
This is consistent with a growth rate of 6.4% for the above example.
The fact that you mentioned GM value went down to nothing and they had fixed assets shows you didn't understand that they meant the stock was worthless not the residual value of it's assets, which is in the hundreds of millions tells me you really have no understanding of business. You don't realize what the wording means so than you really can't understand investing. Please don't waste my time any longer.
Platts unveiled its annual list of the world’s 50 fastest growing energy companies based on their three-year compound growth rate (CGR)
http://www.platts.com/PressReleases/2010/110210
$550,000.00 at 6.4% = $585,200.00
$585,200.00 at 6.4% = $622,652.80
$622,652.80 at 6.4% = $662,502.58
$662,501.73 at 6.4% = $704,902.74
$704,901.06 at 6.4% = $750,016.52
Once again you play the fool as the Dr. says in his opening s tatement the exponential function is anything that grows at a steady rate. As stated so many times the bsiness does not grow at a steady rate but has it's up anddowns through the years. You are trying to look for a back door to your Compound interest mistake. But this doesn't do it for the same reason it is not a steady growth. It is not a compound interest question it is the purchase and sale of a fixed asset. I have stood behind my same answer through all of this while you are all over the place trying to prove your mistake. The businees DID NOT grow at a steady rate it went up and down through the years as all businesses do. Take an Acounting class and learn something you still have not told me where your financial degrees are from.
Maybe you could go back and explain your GM mistake also when you said the Company was worthless you have repeatedly shown your lack of knowledge on this subject and you keep trying to pursue all these different ways to correct your mistake. You remind me of a woman when she is wrong. Probably a Japanese women as they never admit their mistakes.
bklynjs > How do you receive dividends from a business that you own?
The family that owns Porsche receives dividends. I guess they just get a check as income. Dividends are payments made by a corporation (http://en.wikipedia.org/wiki/Corporation) to its shareholders (http://en.wikipedia.org/wiki/Shareholder). It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit (http://en.wikipedia.org/wiki/Profit_%28accounting%29), or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings http://en.wikipedia.org/wiki/Retained_earnings), or it can be paid to the shareholders as a dividend.
Many corporations retain a portion of their earnings and pay the remainder as a dividend. You can buy all the shares of any company if you can afford it. Then all of the dividends will be paid to you.
bklynjs >There is only profit or loss at the end of each period.
It has been said that over the very long run, the stock market has had an inflation-adjusted annualized return rate of between six and seven percent. How do you think they got that?
Look: if the stock market gains 11% annual returns for 70 years. It was not based on any profit or loss at the end of each quarterly period. It is based on how much you put in at the beginning, and how much you get out at the end. We are not talking about net-profits, so costs do not matter.
http://investing.hirby.com/what-is-the-current-stock-market-return-percentage/
This Forbes article below states
Life Partners Holdings return to investors: 120.99% (three years annualized rate)
Universal Insurance Holdings Return to investors: 56.33% (three years annualized rate)
HMS Holdings Corp. Return to investors: 60.3% (three years annualized rate)
http://money.cnn.com/magazines/fsb/fsb100/2009/snapshots/1.html
How did they get that if as you say it is not possible to have an annualized rate on securities?
These paper business's rented office space. They do not have to own fixed assets of any kind if they do not want to.
bklynjs> A business that sold for $750,000 definitely is not on the stock market and it is a private sale.
Business's can be freely traded on the Pacific or Boston exchanges among many other places. The $750,00.00 might not be all of the shares. There could be preferred shares still outstanding. Listed shares can also be sold privately.
A company’s value can go to nothing even if it has fixed assets, like GM. You have heard of General Motors haven’t you. Nothing is less than $750,000.00. There was also Circuit City, Eddie Bauer, and Six Flags, not to mention many of the Detroit car dealers and newspaper companies.
bklynjs > the only stock would be a few shares held by the primary owners and not market traded.
What laws are you citing that says the shares are not a public company. And what difference does it make if they are publicly traded, or not. They were still bought at 550,000 sold at 750,000 five years later for a gross annualized return of 6.4%. How else can you go from 550,00 to 750,000 in five years without getting a return of 6.4%?
The math is always the same.
bklynjs > That would be if they went the corporate route but there would be no stock if held as just a private business.
Are you saying that it is not possible for a private business to issue stock to raise capital?
Business often issue stocks to make it easier to split up the ownership when the boss kicks it, or to raise capital.
bklynjs > A business consists of a building, machinery, and equipment these are fixed assets.
A business can own those things, but in many business's it is not necessary to own buildings, machinery and equipment or any fixed assets, unless you want to. How about a Lecturer, he is in business. What about an Actor, they are in business and sometimes incorporate. Consultants, stock operators etc.
The definition of business does not include fixed assets anywhere that I can see. Suppose you show us where you got that idea. An Elementry school book perhaps.
business |ˈbɪznɪs| |ˈbɪznɪz| ( bus.)
noun
1 a person's regular occupation, profession, or trade : she had to do a lot of smiling in her business | are you here on business ?
• an activity that someone is engaged in : what is your business here?
• a person's concern : this is none of your business | the neighbors make it their business to know all about you.
• work that has to be done or matters that have to be attended to : government business | let's get down to business.
Didn’t you work for a bank. A bank has no fixed assets. All it has are assets, and liabilities on its balance sheet. All of the assets belong to the shareholders. All of the liabilities belong to the lenders. What fixed assets did your bank have?
Was it in business?
Was your bank with no fixed assets of its own in business?
Why do you think if a business has gains, but no fixed assets, that it is not a business?
All business do not have a building, machinery and equipment these are fixed assets. A streetwalker can have a business for example. She does not have any fixed assets.
There is no annual rate of return as you describe it. This is the sale of a fixed asset and in year two you have not made any return on your investment except for profits out of the business. The ROR is annualized to 7.27% not your 6.4%. Once again you are compunding interest on the sale of a fixed asset. There is no compounded interest here and as I stated below I will put up my Accounting Degree against your chairside investment strategy. You example does not apply to the sale of a fixed asset please go read even a basic Advanced Accounting book they give you in College. And I went to a good private School not something off a TV commercial.
P.S. I have also worked on Wall Street for a couple of Banks.
How do you receive dividends from a business that you own? There is only profit or loss at the end of each period. A business that sold for $750,000 definately is not on the stock market and it is a private sale. The only stock would be a few shares held by the primary owners and not market traded. That would be if they went the Corporate route but there would be no stock if held as just a private business.
This best answer is absolutely wrong. Here is another example of how average annual return is used in real life. In this case it is form N-1A for the United States Securities and Exchange Commission with references.
US mutual funds use this to report the average annual compounded rates of return for 1-year, 5-year, and 10-year periods as the "average annual total return" for each fund. The following formula is use.
P (1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion).
Sources: http://en.wikipedia.org/wiki/Mutual_fund
http://www.sec.gov/rules/final/33-7512f.htm#E12E2
http://www.wikinvest.com/wiki/Average_annual_return
This is very simple you are buying and selling a fixed asset there is no annual rate of return due to the fact that there is no return until you sell the business in five years. I don't know why you can't understand this but I'll put up my Accounting Degree to your chairside investment advice.
You are compounding interest on the sale of a fixed asset where ther is no compounded interest. And how do ETF's figure into the question. As stated above I have worked on Wall Street for Banks and know how to figure ROR's and how you handle each one.
Something is missing here. Here is the rule of 72. It says For example, if an investment is expected to returns 10% a year, then it will double in roughly 7 years.
---o00o---
In finance, the rule of 72, the rule of 71, the rule of 70 and the rule of 69.3 are methods for estimating an investment's doubling time or halving time. These rules apply to exponential growth and decay respectively, and are therefore used for compound interest as opposed to simple interest calculations.
For example, if an investment is expected to returns 10% a year, then it will double in roughly 7 years (72 divided by 10). Conversely, if an investment doubled in 5 years, then it grew at about 14% a year (72 divided by 5).
Sources:
Wikipedia, "Rule of 72" - http://en.wikipedia.org/wiki/Rule_of_72
Investopedia, "What is the rule of 72?" - http://www.investopedia.com/ask/answers/04/040104.asp
Investopedia, "Rule of 72" - http://www.investopedia.com/terms/r/ruleof72.asp
Of course you can, this is a basic calculation done by investors all of the time. You need the principle amount, future amount, and the number of periods. Don’t go making something simple, complicated.
200 divided by 5 =40 not 50. ROR is the rate you get on an investment. You can have an annual ROR on your house even though there is not a yearly profit. A stock that doesn't pay dividends can be figured for an annual ROR when sold as this is the comparative method for investing.