I asked my colleagues at work as well as my Facebook wall the following question today. It led to quite an interesting discussion in both places!
Consider the following transaction:
(1) You hand me $100 today.
(2) One year from now I give you $100.
(3) One year after that I give you an additional $10.
That’s it – no further cash flows of any kind happen.
Question – no calculators or anything like that – what is your gut feeling about the annual return you’d be receiving in this transaction?