Posted: October 17th, 2013
The value of the house during sale =$165,000
The initial value of the house = $55,000
The period of increase in value = 9 years
The annual rate of return on the house (ARR) =?
Annual Rate of Return (ARR) = ((Return on the Investment- Capital of Initial Investment)/ Capital) * 100 (Dyckman, Thomas, Magee, and Glenn, p 42)
= (($165,000-$55,000)/ $55,000 * 100
= ($110,000)/ $ 55,000*100
= 200 % spread over nine years
=22.22 % per annum
Therefore, the annual rate of return on investment per annum for nine years is 22.22 % (Harrison, Walter, & Charles pp. 42)
The annual rate of return is described as a fixed yearly rate of return that is influenced by the various market conditions and dynamics. The value of the house at the initial buying price was the key element in the calculation. In addition, the period also enabled the determination of the annual rate of return, which is indicated by a fraction of the price of the house on its initial cost in comparison with the new costs. The increase is then divided by the original value of the house to get a clarified view as to the annual increase in the price of the house on a yearly basis. In addition, the cost of the house could
Subtraction of the initial cost of the house or capital from the new value of the house or asset enables us to arrive at the incremental value in cost of the house. In addition, the value of the house is then divided by the initial cost and then multiplied by one hundred percentage to get the clear rate of increase or decrease in the value of the asset or house. In addition, the newfound rate of increase in the value is then divided by the time or period within which the increase or decrease in value took place. The annual rate of return is however limited in that it only enables us to view past increases or decreases in the value of the house. It however does not enable future predictions as to the rate of increase or decrease of value in an asset.
Dyckman, Thomas R, Robert P. Magee, and Glenn M. Pfeiffer. Financial Accounting. Westmont, Ill.: Cambridge Business Publishers, 2011. Print.
Harrison, Walter T, & Charles T. Horngren. Financial Accounting. Upper Saddle River, NJ: Prentice Hall, 2001. Print.
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