The performance of investments is most often measured by its percentage rate of return. A common method to measure an investment's return is to calculate its dollar weighted return, also known as its internal rate of return. The dollar rate of return is used to calculate how much each investment dollar returned on average to an investor. Because it is a long calculation, it is wise to use financial calculator.
Step 1
Input the present value as PV on your financial calculator. The initial cost of an investment is known as its present value in this financial calculation. Make sure to input the present value as a negative number so the calculator knows its a cash outflow.
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Step 2
Input the future value of the investment as FV on your financial calculator. The future value is the expected sale price of your investment. This will be a positive number as it is a cash inflow to an investor.
Step 3
Record the total number of years of the investment. Input the number of years as N on your financial calculator.
Step 4
Hit the interest button on your financial calculator and it will compute the dollar weighted return of the investment.
Example: An investment costs $10,000 and will return $25,000 in 6 years. What is its dollar weighted return? Input: PV = - 10,000 FV = 25000 N = 6
CPT r = 16.49 percent per year = the dollar weighted return
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