16 September 2011

Tutorial: Internal Rate of Return (IRR): A Road Map to Wealth via Constantly Saving plus Investment

In previous posts (IRR Tutorial 1 & IRR Tutorial 2), we have explained the use of Internal Rate of Return (IRR) via three general examples. Therefore, in this post, we are going to apply IRR for us to have a better understand about "the time value of of our money" in such a way that we will have a good knowledge to grow our wealth in the future.

Example 4:
A Road Map to Wealth via Constantly Saving plus Investment
Annual Saving: 3000
Annual Investing Return Rate: 10%
Period: 15 Years

Year Zero:
Beginning of Year one: 3K
Beginning of Year two:
(total previous accumulation*(1+return rate)) + New Saving
= 3K*(1 + 0.1) + 3K = 6.3K
Beginning of Year three:
(total previous accumulation*(1+return rate)) + New Saving
(6.3k)*(1 + 0.1) + 3k = 9.93K
This answer can be found via the equation below:

FW = A((r+1)^n - 1)/(r)

FW = future worth
A = annual saving or 3K in this example
r = annual return rate or 0.1 or 10% in this example
n = the total year

In other words, the answer of this example is 95.317K with n is 15 years.

So, I believe that this simple mathematic calculation provide a solid plan for us to achieve our financial target step-by-step. That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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