What is the rate of return for the following scenario:

Initial Investment: $300,000
10% Simple Interest Rate received every year for 6 years
$200,000 Initial Investment Returned end of 6th year
End of 7th year, on sale of investment, received $425,000.

What is the rate of return on the initial investment?

ATF -

Graememcrae has given you the ANNUAL rate of return by calculating IRR.

A Total Rate of Return assumes that money has no time-value (or that
interest rates are zero) and would give you the returns on your
initial $300K investment.  That's actually a breeze to calculate: you
make 168% TOTAL return or $505K on a $300K return.

Best regards,

Omnivorous-GA

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Request for Answer Clarification by askthefool-ga on 06 Jun 2004 17:15 PDT

This is not correct. According to CNN Money Calculator the total return is:


Annualized Return: 18.88%
Return for the entire period: 235.55%

Starting date: 1/1/2000
Starting value: $300,000

Ending date: 1/1/2007
Ending value: $425,000

Additional deposits and withdrawals:

Withdrawal:   Date 1/1/2001   Amount $-30,000.00
Withdrawal:   Date 1/1/2002   Amount $-30,000.00
Withdrawal:   Date 1/1/2003   Amount $-30,000.00
Withdrawal:   Date 1/1/2004   Amount $-30,000.00
Withdrawal:   Date 1/1/2005   Amount $-30,000.00
Withdrawal:   Date 1/1/2006   Amount $-230,000.00 

What method are they using?

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Clarification of Answer by omnivorous-ga on 07 Jun 2004 06:02 PDT

Askthefool --

I'll stand by those return numbers.  At least the CNN Money Calculator
agrees on annualized return or IRR at 18.87%.

But in order for you to get a 235.55% return, the $300,000 investment
would have to produce $1,006,650 in cash flows.  Your cash flows total
$805,000 -- or a 168.33% return ($505K return on a $300K investment). 
Cash flows are 268.33% of the initial investment -- but total return
isn't measured including your initial investment.

I tried to make the CNN/Money calculator here work this morning to see
if there's some error that it's making but it won't allow data entry
early on this Monday morning:
http://cgi.money.cnn.com/tools/returnrate/returnrate.jsp

Best regards,

Omnivorous-GA

The Internal Rate of Return (IRR) can be calculated using an Excel
spreadsheet (the excel function is XIRR).

It's not exactly clear to me exactly what the cash flows are, so I'll
tell you what I used:

1/1/2000 -300,000
1/1/2001   30,000
1/1/2002   30,000
1/1/2003   30,000
1/1/2004   30,000
1/1/2005   30,000
1/1/2006  230,000
1/1/2007  425,000

If this is the way cash flowed in and out of your pocket, then your
internal rate of return is 18.8704%

What is the TOTAL rate of return?

I also calculated that via the XIRR formula in Excel, howerver, I need
to know what is the total rate of return. Do you just multiple it by
the number of years?

And what exactly is this 18% rate of return telling us? Is it the
yearly rate of return?