What is my annual return?

skc said:

How would you determine the annual return if I:

Here are 3 possible solutions:

1. Total profit = $30K. Total capital put in = $65K. Return = 46.2%
2. Total profit = $30K. Time weighted capital = $40K. Return = 75%
3. Time weighted average of annualised return for each period. So period 1 = 40% over 6 months, period 2 = $10k/$55K over 3 months, period 3 = $10K / $75K over 3 months. Average to be ~71.5%
4. Similar to 3 above but exclude the compounding profits in calculating the annualised returns. This works out to be ~77.7%

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SusanW said:

No. 1 isn't an annualized return because all principal wasn't in for 12mths.
No. 2 isn't an annualized return because you don't time weight receipt of returns.
No. 3 is compromised because you presume your profit comes in equally over each month of each period.

Some other ways:

1. annual return calculated monthly
set up a xls thus:
Col A month
B cash injections
C monthly net profit loss
D cumulative cash injections
E monthly return on investment (C/D)
annual return = Sum(E:E)

2. Internal rate of return
make Column G net monthly cash flows, where cash injections are negative amounts (-B+C), except for month 12, which gives back cash injections (-B+C+D)

use excel IRR function thus =IRR(G:G) where G:G are the rows in col g for the 12 mths.
IRR figure is average return per month.
Multiply by 12 to get annualized return.

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skc said:

Thanks Susan... you didn't join ASF just to answer my question, did you?

For the record, using the method you suggested above, the numbers are 77.6% and 91.%.

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skc said:

Dump question.

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SusanW said:

I've been a lurker for a few days, and joined so I could search the forums better.

I got an IRR of 81.3%

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MITCH027 said:

80+% looks too high. I haven't used that excel formula much outside of uni so don't know a lot about how it works (and it was quite basic at uni - I wasn't a finance major). As you guys know, when you put the capital in would have a large effect on the rate of return

I got 69.9425%. Might not be exactly that figure but its close

You made a 80% pa return for the first six months (10x2/25)
You made 72.72% pa for the next 3 months (10x4/55)
You made 47.65% pa for the last 3 months (10x4/85)

How do you check? Work backwards:

Starting capital: $25K
$25K * 0.69425 / 2 + $25K (for principal) = $33,678
$53,678 * 0.69425 / 4 + $53,678 = $62,994
$82,994 * 0.69425 / 4 + $82,994 = $97,398

Ending capital from your post = $95,000

Not exactly equal but I would put that discrepancy down to rounding. I also used a hand calculator

Any of these calculations work off your capital base, you don't separate profit from capital/principal base

If you were to put in an average return of 80%+, you'll find that the mismatch would be larger

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skc said:

I think it's a matter of choice whether you include the profit in calculation.

A very simple way of thinking about it... you started the year with $50K, and ended the year with $20K profit, you will just say you made 40%. You will not go break it down further on the distribution of the $20K through the year and consider profits in the first half to be compounding.

On the other hand, you can also make a case that leaving the profit in the account is a conscious decision and is no different to injecting additional capital.

So neither here nor there imo.

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