Question

Tammy can buy an asset this year for \(\$ 1,000 .\) She is expecting to sell it next year for \(\$ 1,050 .\) What is the asset's anticipated percentage rate of return? a. 0 percent. b. 5 percent. c. 10 percent. d. 15 percent.

Short answer

The asset's anticipated percentage rate of return is 5 percent.

Step-by-step solution

Identify Initial and Final Values

The initial price Tammy pays for the asset is the cost today, which is \( \\( 1,000 \). The expected selling price next year, or the final value, is anticipated to be \( \\) 1,050 \).

Calculate the Difference in Value

Subtract the initial value of the asset from the expected final selling price to find the gain. The calculation is \( \\( 1,050 - \\) 1,000 = \$ 50 \).

Determine the Percentage Rate of Return

To find the percentage rate of return, divide the gain by the initial value and multiply by 100 to convert it into a percentage. The calculation is: \[ \frac{\\( 50}{\\) 1,000} \times 100 = 5\% \].

Choose the Correct Answer

Based on our calculation, the anticipated percentage rate of return is \( 5\% \). Therefore, the correct answer is choice b.

Key concepts

Financial Calculations

Financial calculations are key to understanding the potential outcomes of investments. They help investors make informed decisions.
One crucial calculation is determining the percentage rate of return on an investment. This rate shows how much money an investor expects to make in relation to the original amount invested.
To calculate this, start by finding out how much you originally invested. Then figure out how much you expect to earn or receive once you sell or cash out that investment.

• The initial amount you put in is called the initial value.
• The amount you expect to get back is called the final value.
• The difference between these two gives you the gain or loss.

By dividing the gain by the initial value, you understand how much the investment has grown compared to what you first put in. To express this growth as a percentage, multiply the result by 100. This percentage is the rate of return, which is a handy metric for comparing various investments.

Investment Return Analysis

Investment return analysis involves examining the profitability of an investment, often through percentage rate calculations. This analysis helps you evaluate whether an investment met expectations or if it delivered returns lower than anticipated.
When conducting this analysis, the main focus is on comparing the expected return against the actual return. This can indicate whether an investment is worthwhile and how it performs relative to similar opportunities.
To break it down:

• Identify the expected rate of return. This is usually the goal or target you set before investing.
• Calculate the actual rate of return using the formula: \[ \frac{\text{Gain}}{\text{Initial Value}} \times 100 \]
• Compare the actual return with the expected return to see if it meets, exceeds, or falls short of expectations.

This comparison helps investors make future decisions about holding, selling, or doubling down on investments, effectively guiding their strategy based on historical performance.

Economics Education

Economics education provides insights into how money and investments work, which is essential for making smart financial decisions. A solid foundation in economics equips you with tools and knowledge necessary for tackling real-life financial scenarios.
Learning about percentage rates of return is a part of this education. It allows students to see how investment returns are calculated and analyzed and understand the practical impact these rates have on personal and broader economic levels.

• It builds critical thinking skills about economic activity and investment strategy.
• It encourages young investors to understand concepts like risk, return, and market behavior.
• It enables you to make more informed personal financial decisions.

Ultimately, economics education helps in developing a sense of economic responsibility, ensuring future investors know how to grow their wealth responsibly and sustainably.