Finding the rate of return with positive cash flows.To simplify things, all the following examples involve yearly compounding and annual cash flows (if applicable). The best way to get familiar with this tool is to consider three real-life examples. Since this procedure would take a considerable time and effort, we use one of the most common iterative technique in the present calculator, called the Newton Method, to find ROR from the rate of return equation above. In our case, the iteration is made with the following rate of return formula ( ROR):įV = PV * (1 + ROR)ⁿ + Pmt * (1 + ROR)ⁿ⁻¹
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A traditional technique for such a problem is to employ the iteration method, which is a series of approximations leading us to the right answer. The fact is, at least according to mathematicians, there is no straightforward formula that can give an exact solution to find the rate of return. When we would like to account for the time length and effect of reinvested return, in particular the compounding frequency, things become tricky. If the rate takes a negative form, we have a negative return, representing a loss on the investment, assuming the amount invested is greater than zero. Rate of return = (final amount received - initial value) / initial value In this case, you don't need to consider the length of time, but the cost of investment or initial value and the received final amount. We can compute the rate of return in its simple form with only a bit of effort.