How to Calculate Average Rate of Return on Future Value

by C. Taylor

You may have some idea how much cash you have available for investing, which is called the present value of an investment. You may also have a particular monetary goal in mind, which is called the future value. However, you may not know what is required to meet that goal. Using a modification of the present value formula, you can determine the average annual return which would allow you to meet the desired total. As an example, you might have $50,000 to invest and want to achieve $150,000 within 10 years. What is the average annual return to meet that goal?

1. Divide the future value of the investment by the present value. In the example, you would divide $150,000 by $50,000 to get 3.

2. Raise this figure to the nth power, where "n" is 1 divided by the number of years for the investment. In the example, you would raise 3 to the power of 1/10, or 0.10. This gives you 1.1161.

3. Subtract 1 to get the average annual return required to meet your goal. In the example, you would need an average annual return of 0.1161, or 11.61 percent.

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