The return rate on an investment is the percentage amount of money an investor stands to receive as returns on an investment. From what keeps happening in the world today, it is obvious that time alone affects money (or any other thing for that matter). If you have some money saved up in a piggy bank, it will lose value with time. This is because it is not being put to any good use. But, if you are to save your money in a bank account, you will get some returns because the bank is putting your money to some use. They offer you a certain rate of return, and turn around to give out your money to some other person as a loan, and charge the person a higher interest rate. So at the end of the business between that bank, the debtor, and you, when the debtor finally gets to pay back the money borrowed from the bank, he or she pays it with an agreed interest rate, the bank gives you some of the interest rate and rate of return for using your money, and then keeps the rest as their own profit.

From what has been said so far, the rate of return on an investment can also be defined as the yield. If the bank tells you that its savings account pays an interest rate of 2%, it means that it is yielding 2% of whatever money you have in your banks account after one month. This is the simple basics of how return on investment works. Saving money in the bank is a good way to explain this. Another good way to do it is with what happens in the stock market.

THE CASH FLOW METHOD:

There are different ways of calculating the return rate of a business, one of which is the cash flow method. This method has proven to be more effective in many occasions, and more accurate than many others. Here are the steps to take

1.    On a spreadsheet, lay out the number of years being considered along a single row

2.    Since the first year is mostly about building the business with as much resources as possible, show the total investment required as a negative number.

3.    Show the total return of the investment on the sheet, from the first to the last year. Hopefully, this should have a positive number

4.    Find the sum of two of the rows to get the net cash flow number

5.    Find the total of returns for the years to find out how much was invested, how much was made, and the net profit.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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