Rate of Return Formula
The rate of return formula calculates the total return on an investment over a period of time. The nature of return can be either profitable or of loss. It is expressed in the form of a percentage and can be referred to as ROR. Let us study the rate of return formula using solved examples.
What is Rate of Return Formula?
A rate of return (RoR) means the profit or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost. The rate to return formula determines the percentage change from the beginning of the period until the end. If the rate of return formula gives a positive value, that means that there is a gain or profit in the investment. A negative value for the rate of return formula means that a loss has occurred on the invested amount. The rate of return formula is given as,
Rate of Return = [(Current Value - Original Value) ÷ Original Value] × 100
R = \( \dfrac{V_c − V_o}{V_o}\) × 100
where,
- Vc = Current value
- Vo = Original value
Examples Using Rate of Return
Example 1: An investor purchased a share at $10 and he had purchased 500 shares in the year 2017. After one year, he decides to sell them at $15 in the year 2018. Calculate the rate of return on his invested amount of $5,000.
Solution:
Given:
Invested amount = $5,000
Using rate of return formula,
Rate of Return = [(Current Value - Original Value) ÷ Original Value] × 100
= [(15 × 500 - 10 × 500) ÷ 10 × 500] × 100
=[(7500-5000)÷ 5000] × 100
=[2500÷ 5000] × 100
=[1/2] × 100
= 50%
Therefore, the rate of return on investment = 50%
Example 2: Sam bought a house for $250,000. He plans on selling the house six years later for $335,000, after deducting any realtor's fees and taxes. Calculate the rate of return on the complete transaction.
Solution:
Using rate of return formula,
Rate of Return = [(Current Value - Original Value) ÷ Original Value] × 100
= [(335,000 - 250,000) ÷ 250,000)] × 100
= 34%
Therefore, the rate of return on the complete transaction = 34%
Example 3: Eddie invested in some shares in 2005 by paying $2,000 and in 2007 he sold it for $3500. Using the rate of return formula, calculate the rate of return.
Solution: Given,
Current value = 3500
Original value = 2000
Using rate of return formula,
Rate of Return = [(Current Value - Original Value) ÷ Original Value] × 100
= [(3500 - 2000) ÷ 2000] × 100
= 75%
Therefore, the rate of return is 75%
FAQs on Rate of Return Formula
What is the Meaning of Rate of Return Formula?
The rate of return formula calculates the total return on an investment over a period of time. The nature of return can be either profitable or of loss. It is expressed in the form of a percentage and can be referred to as ROR.
What is the Formula to Calculate the Rate of Return Formula?
The rate of return formula is given as,
Rate of Return = [(Current Value - Original Value) ÷ Original Value] × 100
R = \( \dfrac{V_c − V_o}{V_o}\) × 100
where,
- Vc = Current value
- Vo = Original value
What are the Uses of the Rate of Return Formula?
The rate of return formula is used in investment, real estate, bonds, stocks, and much more. The rate of return is the asset that has been purchased and got in income in the same year or future. The formula of the rate of return is used in that asset when sold for a certain amount of money and determining the percentage gained from it.
Using the Rate of Return Formula, Find the Return Rate of Jack's Stock when he Bought for $20,500 but sold it for $52,350 the year later.
Given,
Current value = $52350
Original value = $20500
Using rate of return formula,
Rate of Return = [(Current Value - Original Value) ÷ Original Value] × 100
= [(52350 - 20500) ÷ 20500] × 100
= 156%
Therefore, the rate of return is 156%
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