Excel formulas might seem overwhelming at first, but with a little bit of practice and understanding, they can truly transform your workflow. Today, I’m going to explain RRI, one of the most commonly used Excel formulas, and why it should be in your toolbox.
RRI stands for Rate of Return on Investment and is often used to calculate the annualized rate of return for a series of investments. This formula is especially handy when trying to compare two investments with different compounding periods. The RRI formula returns the percentage for the return on investment based on the initial investment and cash flow received.
The RRI formula includes three main components:
Using these components, the RRI formula can calculate the annualized rate of return on investment using the following equation:
RRI = (1 + f)^(365/N) -1
Where f is the rate of return and the exponent, 365/N, represents the number of times the investment is compounded during the year (365 is the number of days in a year and N is the number of investment periods).
To use RRI in Excel, you must first have a list of cash flows and the period for which they were received. In our example, we will assume that we are investing in a project that will yield returns during 10 periods. The amount of cash to be received in each period is:
We will also assume that the initial investment amount is $2,500. To calculate the RRI, use the following formula:
=RRI(10,-2500,200,350,425,500,325,600,450,375,425,520)
When you press enter, Excel will return the RRI of 6.56%. This means that the project will yield a return of about 6.56% per year, compounded annually.
The RRI formula is useful for a variety of reasons. For example, it helps us to compare investments that have different compounding periods. Additionally, it allows us to better understand how much return we are getting on our investment per year.
Lastly, RRI provides us with a better assessment of how profitable our investment is, because it takes into account the time value of money.
Excel formulas like RRI can give you an edge when it comes to financial analysis. By making use of Excel formulas, you can better understand the investments you are considering and compare them more effectively.
If you're not familiar with RRI, don't be intimidated. Start practicing and using Excel formulas like it in your daily workflow, and you’ll quickly realize how powerful they can be.
So go ahead, give it a try and let us know what you think!
