What is the rate of return?
The rate of return measures the performance of an investment. The rate of return is calculated by dividing any gain or loss by the initial cost of an investment, or the percentage change of the investment’s value over a given period. The rates of return usually account for any income received from investments in addition to any capital gains.
What is Internal Rate of Return (IRR)?
The internal rate of return is used to estimate the profitability of a potential investment. More specifically, the IRR is the exact discount rate that makes the net present value (NPV) of all cash flows of an investment equal to zero.
This calculation does not take into account external factors such as the risk-free rate, inflation, cost of capital or financial risk. IRR estimates a project’s rate of return, which indicates a project’s potential profitability.
how to calculate rate of return
To find the rate of return, take the present value of an investment and subtract the initial value (this will give you a positive or negative number, depending on whether your investment has gained or lost value). Dividing this number by the initial value of the investment and multiplying it by 100 will give you the percentage rate of return.
For example, if you spent $50 on an investment that is now worth $300, the formula would look like this:
[(300-50) / 50] x 100 = 500% return on investment
However, this calculation does not take inflation into account. To calculate price with inflation, you can use bankrate calculator,
required rate of return
Expected rate of return is the profit or loss that an investor expects to gain or lose from the investment. It is determined by looking at the historical rate of return and multiplying the possible outcomes by the probability of them occurring.
learn more about Expected future returns in a rising rate environment,
personal rate of return
The individual rate of return is the amount of profit or loss over a period of time, divided by your cash flow activity. It is calculated in the same way as the rate of return, but it is specific to all of your investments, as opposed to a single investment. Your contributions are also included in your personal return rate.
