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Question 5.T-Y-S.J: The “Arctic Express” mutual fund company invests its monies ...

The “Arctic Express” mutual fund company invests its monies in Russia. They claim that money invested with them will quadruple in value over the next 10 years. Suppose you decide to invest \$ 200 per month for the next 10 years in this fund. If their claim is true, what effective annual rate of return (IRR) will you have earned in this fund? (5.6)

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Letting A=\$ 200 per month, we solve for the unknown interest rate (IRR) as follows:

4[\$ 200(120)]=\$ 200\left(F / A, i^{\prime}\right. per month, 120 months )

480=\left[\left(1+i^{\prime}\right)^{120}-1\right] / i^{\prime}

Solving this, we find that i^{\prime}=1.98 \% per month. The annual effective IRR is (1.0198)^{12}-1=0.2653. Thus, IRR =26.53 \% per year – not a bad return!

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