Question: The Southern Guru CopperCompany 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 World 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:
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, claiming the actual rate of return is much lower, asks you to compute it.