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Money rate of return |
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Money rate of returnAnnual money return as a percentage of asset value.Money rate of return Similar MatchesTotal return for calendar yearTotal return for calendar yearThe profit or loss realized by an investment at the end of a specified calendar year, stated as the percentage gained or lost per dollar invested on January 1. Return on total assetsReturn on total assetsA measure of how good a company is at 'squeezing' earnings out of the assets employed in its business, which is calculated as follows:Return on assets = (profit before interest and tax) / (fixed assets + current assets)If you are using this ratio to evaluate a company, you need to consider what kind of business the company is in. 'People' businesses, such as advertising agencies, need very few capital assets compared with a manufacturer which typically needs to invest large amounts in plant and equipment.In general, a return of 12% is adequate and a return of 16% or more is considered good. Compound Annual ReturnCompound Annual ReturnSee: Compound Annual Growth Rate Multiple rates of returnMultiple rates of returnMore than one rate of return from the same project that make the net present value of the project equal to zero. This situation arises when the IRR method is used for a project in which negative cash flows follow positive cash flows. For each sign change in the cash flows, there is a different rate of return. Internal rate of returnInternal rate of returnThe interest rate which, when used as the discount rate for a series of cash flows, gives a net present value of zero.To understand this, remember the fundamental concept that £1 received in ten years is not worth as much as £1 received now, because £1 received now can be invested for ten years and compound into a higher amount.So if you are a project financier, and you are considering the viability of a project that requires up front capital expenditure, which will be recouped by net cash inflows in years 3, 4 and 5, you have to discount the earnings in those later years to establish their net present value. The discount you apply is the crucial thing, but the IRR gives you a starting point -it is the discount rate at which the project will break even.If you apply a discount rate to future cashflows that is higher than the IRR, the project will make a loss in real terms. If you apply a discount that is lower than the IRR, the project will be profitable. Further SuggestionsCumulative abnormal return (CAR)External increasing returns to scale Return on sales Annual rate of return Maximum expected return criterion (MERC) Holding period return Expected return beta relationship Risk return tradeoff Rate Of Return Return to capital Consolidated tax return Risk adjusted return total return joint tax return Rate of return Geometric mean return Decreasing returns to scale T period holding period return Law of Diminishing Returns Subperiod return Annualized holding period return Portfolio internal rate of return Mean return Return on total assets Return to maturity expectations |
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