The Southern Guru Copper Company operates a large mine in a South American country. A legislator in the National Assembly said in a speech that most of the capital for the mining operation was provided by loans from the Word Bank; in fact, Southern Guru has only $500,000 of its own money actually invested in the property. The cash flow for the mine is:
Year Cash Flow
0..........................$0.5 million investment
1..................................3.5 million profit
2...................................0.9 million profit
3...................................3.9 million profit
4...................................8.6 million profit
5...................................4.3 million profit
6...................................3.1 million profit
7...................................6.1 million profit
The legislator divided the $30.4 million total profit by the $0.5 million investment. This produced, he said, a 6080% rate of return on the investment. Southern Guru claims the actual rate of return is much lower. They ask you to compute their rate of return.