To calculate the rate of return, you’ll need the initial investment value, the final investment value, and the time period over which the investment was held.
Page written by Ian Hawkins. Last reviewed on May 17, 2024. Next review due March 1, 2025.
This calculator is intended for illustration purposes only and exact payment terms should be agreed with a lender before taking out a loan.
Rate of return is a financial metric that measures the percentage change in the value of an investment over a specific period, taking into account both income generated and capital appreciation. It is often abbreviated as ROR.
The formula for calculating the rate of return is as follows:
Rate of return=(final value−initial value)/initial value×100
Here’s how to calculate it step-by-step:
The internal rate of return (IRR) is calculated by setting the net present value (NPV) of cash flows generated by an investment equal to zero and solving for the discount rate that achieves this condition.
The interest rate of return is calculated by dividing the total interest earned on an investment by the initial investment amount, expressed as a percentage.
While a higher rate of return often indicates better performance, it's essential to consider other factors such as risk, volatility and investment objectives before determining the suitability of an investment.
The nominal rate of return is the actual rate of return on an investment, while the real rate of return adjusts for inflation, providing a more accurate measure of purchasing power.
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