Most of the previous problems may be solved using interest tables and financial calculators. There are, however, problems that are not easily solved using interest tables. For example, solving for the return on an investment that involves both an annuity and a single payment is a tedious process if you use interest tables. The same applies if the cash flows vary each year. However, a financial calculator may readily solve these problems.

Problem 31 illustrates this reality. All three parts are easily solved using a financial calculator but require that you employ a reiterative process when you are using interest tables. That is, you set up the equation and select a rate. If the results equate the two sides of the equation, you have solved the problem and determined the return. If not, you have to repeat the process until you have selected the rate that equates the two sides. After doing a couple of these problems, you may decide that learning how to use a financial calculator or a program such as Excel is worth the effort.

a. You purchase a stock for $10,000 and collect $400 at the end of each year in dividends. You sell the stock for $11,300 after four years. What was the annual return on your $10,000 investment?

b. You purchase a building for $900,000, collect annual rent (after expenses) of $120,000, and sell the building for $1,000,000 after three years. What is the annual return on this investment?

c. You buy a stock for $1,000 and expect to sell it for $900 after four years but also expect to collect dividends of $120 a year. Prove that the return on this investment is less than 10 percent.