Overview

Main Menu Name: Return

Calculates the compound annual rate of return on an investment. The calculation is based on the present value (or cost) of the investment, the projected future value, and the term or holding period of the investment.

In this article:

• Background
• Why should I use this calculator?
• Getting Started
• Entering Data
• Results

Background

One of the most important factors in evaluating any investment is the rate of return expected. Once this is known (or estimated), a potential investment can be compared with other alternatives. For example, a purchase of common stock might be compared with a real estate investment.

Of the three factors involved in the calculation, only the present value or cost is generally known with certainty, though it may be subject to negotiation. The investment's future value and how long the investment will be held can only be estimated. This lack of knowledge can lead to wide variations in the estimated rate of return from the investment. For example, an investment that doubles in value in five years will yield a 15% (approximately) return while one that takes eight years to double will provide only a 9% (approximately) return.

Risk is another factor that must be taken into account in any investment situation. Investments that involve greater risk should provide higher rates of return to compensate the investor for the increased risk. An investor would be foolish to accept a 7% return from a speculative, high-risk investment when approximately the same return is available from relatively secure certificates of deposit and money market funds.

Why should I use this calculator?

• To evaluate the attractiveness of future investment opportunities.
• To analyze the impact on an investment of different assumptions regarding future selling price and holding period.
• To compare two or more investments based on their projected rate of return.
• Supplement other types of investment analysis (such as HPR and IRR).

Getting Started

One of the most important factors in evaluating any investment is the rate of return expected. Once this is known (or estimated), a potential investment can be compared with other alternatives. For example, a purchase of common stock might be compared with a real estate investment.

Of the three factors involved in the calculation, only the present value or cost is generally known with certainty, though it may be subject to negotiation. The investment's future value and how long the investment will be held can only be estimated. This lack of knowledge can lead to wide variations in the estimated rate of return from the investment. For example, an investment that doubles in value in five years will yield a 15% (approximately) return while one that takes eight years to double will provide only a 9% (approximately) return.

Risk is another factor that must be taken into account in any investment situation. Investments that involve greater risk should provide higher rates of return to compensate the investor for the increased risk. An investor would be foolish to accept a 7% return from a speculative, high-risk investment when approximately the same return is available from relatively secure certificates of deposit and money market funds.

Entering Data

1. Present Value Amount:  Enter the present value of the asset or investment.
2. Expected Future Value Amount:  Enter the expected future value of the asset or investment.
3. Time Period:  Enter the term or holding period (number of years) for the asset or investment.

Results

The program calculates the compounded annual rate of return on an asset or investment.