RATE OF

RETURN
Is it easy to calculate it?

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BASIC
CALCULATION
You must understand

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Future Value =

i = interest rate in a certain period

n = number of periods (can be in years, months and so on)
F = Future value or future value of principal value FUTURE VALUE
P = Present value or principal or present value

𝑛
𝐹 =𝑃 ( 1+𝑖 )
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PRESENT
VALUE N

P=F(PVIF)
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A = Annuity FUTURE VALUE
I = Interest rate ANUITY

( )
n
( 1+i ) −1
F= A = A { FVIF A k ,n }
i

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HOW TO FIND
ANNUITY IF THE FUTURE VALUE OF THE ANNUITY IS $
3,121.60 FOR 3 YEARS WITH 4% INTEREST,
WHEN THE THE ANNUAL VALUE OF THE ANNUITY IS:
FUTURE VALUE
IS KNOWN
.

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HOW TO FIND PRESENT VALUE IF ANNUITY IS
KNOWN

THERE IS AN EQUAL SET OF

PAYMENTS OF $ 1,000 OVER
3 PERIODS WITH INTEREST
OF 4% AT THE END OF EACH P.
PERIOD. THE PRESENT
VALUE OF THE ANNUITY IS

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 IF THE PRESENT VALUE OF AN
ANNUITY IS $ 2,775.1, THE
. VALUE OF THE ANNUITY FOR 3
YEARS WITH AN INTEREST RATE
HOW TO FIND OF 4 PERCENT PER YEAR IS

ANNUITY IF P IS
KNOWN

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PRESENT VALUE OF ANNUITY WITH GRADIENT

THERE IS A PAYMENT AT THE END

OF EACH YEAR WHERE IN THE FIRST
YEAR IT IS 100,000 RUPIAH. THIS
PAYMENT IS INCREASED BY 10
THOUSAND RUPIAH PER YEAR WITH
AN INTEREST OF 10% PA FOR 5
YEARS. CALCULATE THE PRESENT
VALUE OF THIS VALUE

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RATE OF
RETURN
How to calculate

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ROR
ROR is an interest rate that is able to balance all
expenses and income in a period or time
horizon. The mathematical model for
calculating ROR is as follows

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 MULTIPLE RATE OF
RETURN
In the previous example, cash flow changes
only once in a period where in period 0 the
cash flow is negative and in the next period the
cash flow is positive. At multiple rates of return,
cash flows can be positive and negative over
the time horizon. For example, the company
invests B at the beginning of the period. The
estimation shows that in period 1 the company
will get a profit of C, in period 2 the company
has a loss of D and in period 3 the company will
have a profit of E. Then the mathematical
model is
3
𝐹𝑡 𝐵 𝐶 −𝐷 𝐸
𝑁𝑃𝑊 =∑ 𝑡
= 0
+ 1
+ 2
+ 3
=
𝑡 =0 ( 1+𝑖 ) ( 1+𝑖 ) ( 1+𝑖 ) ( 1+𝑖 ) ( 1+𝑖 )

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EXAMPLE

Case Cash flow

A project made an initial investment of a machine of $

500,000 and the machine generated cash flow for the • Net Cash Flows
following 6 consecutive years: $ 120,000 $ 115,500 $
130,000 $ 116,500 $ 117,250 and $ 200,000. Based on this • CF0 = -500000
data, calculate the ROR! CF1 = 120000
CF2 = 115500
CF3 = 130000
CF4 = 116500
CF5 = 117250
CF6 = 200000

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HOW
First step
The first step of the iteration is to choose any interest rate, for the first one an
interest rate of 11% is chosen and then the present value of each cash flow is
calculated:
• Present value CF1 = 120000/(1+11%)1 = 120000/1.11 = 108108.11
Present value CF2 = 115500/(1+11%)2 = 115500/1.2321 = 93742.39
Present value CF3 = 130000/(1+11%)3 = 130000/1.36763 = 95054.88
Present value CF4 = 116500/(1+11%)4 = 116500/1.51807 = 76742.16
Present value CF5 = 117250/(1+11%)5 = 117250/1.68506 = 69582.17
Present value CF6 = 200000/(1+11%)6 = 200000/1.87041 = 106928.17
• NPV = 108108.11 + 93742.39 + 95054.88 + 76742.16 + 69582.17 +
106928.17 -500000
NPV = 550157.88 -500000
NPV at 11% = 50157.88
Second step
The second step of the iteration is to choose any interest rate, for the second one an
interest rate of 16% is chosen and then the present value of each cash flow is
calculated:
• Present value CF1 = 120000/(1+16%)1 = 120000/1.16 = 103448.28
Present value CF2 = 115500/(1+16%)2 = 115500/1.3456 = 85835.32
Present value CF3 = 130000/(1+16%)3 = 130000/1.5609 = 83285.5
Present value CF4 = 116500/(1+16%)4 = 116500/1.81064 = 64341.91
Present value CF5 = 117250/(1+16%)5 = 117250/2.10034 = 55824.25
Present value CF6 = 200000/(1+16%)6 = 200000/2.4364 = 82088.45
Selanjutnya dilakukan perhitungan NPV pada bunga sebesar 16%
• NPV = 103448.28 + 85835.32 + 83285.5 + 64341.91 + 55824.25 + 82088.45 -
500000
NPV = 474823.71 -500000
NPV at 16% = -25176.29
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LAST STEP -
INTERPOLATION
iL = 11%
iU = 16%
npvL = 50157.88
npvU = -25176.29
ROR = iL + ((iU-iL)(npvL))/([npvL-npvU] )
ROR = 0.11 + ([(0.16-0.11)(50157.88)]
)/([50157.88-25176.29] )
ROR = 0.1433
ROR = 14.33%

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 SUMMARY

ROR is a metric used in financial analysis to estimate the profitability of a potential investment. The internal rate of return
is the discount rate that makes the net present value (NPV) of all cash flows equal to zero in the discounted cash flow
analysis. The calculation for ROR relies on the same formula as NPV. To calculate the ROR using the formula, the NPV value
is equal to zero at a certain interest rate resulting from the iteration. In general, the higher the ROR level, the more
desirable the investment will be. The ROR can be used to rank multiple investments or prospective projects on a relatively
even basis. In general, when comparing investment options with similar other characteristics, the investment with the
highest ROR will probably be considered the best

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LARGE IMAGE SLIDE

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THANK
YOU
Putera Batam University
Industrial Engineering Department
+62 823-9128-7111

academic@puterabatam.ac.d

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