Calculating The Return On Investments: ROI vs IRR
This post is a good refresher course on the difference between ROI and IRR, both of which are useful metrics for evaluating investment performance. Click Here To Skip The Introduction and Read The Full Article on ROI and IRR
Article Introduction (Via Mind Your Decision)
Whether you are investing in the stock market or a business project, you need to understand rates of return. Stock gurus talk about things like ROI and IRR, but what do they mean? I’ll go through the logic of each method and explain why IRR is my preferred choice.
Article Excerpts (Via Mind Your Decision)
“ROI is the simplest return measure and also the most often quoted. ROI is defined as the percentage increase or decrease of an investment over a period of time. This method gives an idea of how much an investment is growing or declining.”
“There are two reasons the ROI is useful. First, ROI gives a quick assessment of investment performance, and it helps that ROI can be computed mentally. Second, ROI is useful when comparing two investments over the same time period. If one mutual fund had an annual ROI of 15 percent compared to another that had 10 percent, you could conclude the first performed better.”
” I bet you are already familiar with IRR because it is given a special name when quoted on products like CDs or savings account. The IRR is called the APY, the annualized percentage yield. IRR is a more sophisticated return measure and is widely used in the finance world for valuations. IRR is the annualized compound rate which can be earned on invested money, also known as the yield. IRR takes into account the investment growth but unlike ROI it also accounts for the timing of the cash flows.”
