Question

Question: Franklin Templeton has just invested $9,260forhisson(ageone).Thismoneywillbeusedforhisso{n}^{\prime }seducation18yearsfromnow.Hecalculatesthathewillneed$71,231 by the time the boy goes to school. What rate of return will Mr. Templeton need in order to achieve this goal?

Short answer

Answer

The required rate of return is 12%.

Step-by-step solution

Identification of the required information

Present value (PV) = $9,260

Periods (n) = 18

Future value (PV) = $71,231

Computing the required rate of return (i)

$$\begin{gathered} \mathit{F}\mathit{V}\mathbf{=}\mathit{P}\mathit{V}\mathbf{\times }{\left(1+i\right)}^{\mathbf{n}} \\ \mathbf{\$}\mathbf{71}\mathbf{,}\mathbf{231}\mathbf{=}\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{260}\mathbf{\times }{\left(1+i\right)}^{\mathbf{18}} \\ \mathit{i}\mathbf{=}\mathbf{12}\mathbf{\%} \end{gathered}$$