For 20+ years, I’ve been carrying an old plastic card around in my wallet that is a great cheat sheet for investment-minded folks to quickly assess various return options. I decided to recreate it here as I think you’ll find it very useful. (You can click on the image to get a larger image that you can print.)
The Present Value of $1 table shows what a dollar is worth today if you were expecting to obtain a certain rate of return over a defined period of time. If, for example, if you were considering an investment, business or personal, where you expected to receive a 15% rate of return over a 5 year period, that dollar is worth about $.50 today. Said another way, if you invested $.50 today for 5 years with an expected 15% annual rate of return, you’d have about $1.00 at the end of 5 years.
The second chart, the Internal Rate of return (IRR) on a multiple of original investment realized over an assumed time period is more valuable when considering venture or other investment capital. Let’s say you’re wondering about the rate of return that an outside investor might be seeking in an investment in your company.
If you learn, for example, that an investor typically seeks a 5X return of capital during the period of his investment, and expects to get this money back in 5-7 years, you could quickly determine that his target rate of return, or IRR (internal rate of return), must be somewhere between 38% over 5 years (look down Column One to the “5″ year line, then across to the 5X expected return column), and 32% over a 7 year time frame (look down Column One to the “7″ year line, then across to the 5X expected return column). You can verify it by multiplying a any investment amount by 132% over 5 years to see that it is 5X the original amount.
Print these and fold them up in your wallet. You’ll be surprised how often you’ll refer to them.
Welcome to Exkalibur. I’m Lary Kirchenbauer, President of Exkalibur Advisors, Inc. Please take advantage of our resources to help you build your business ... and let me know what more we can do to serve you.
Read my latest column from the NY Times affiliate, the North Bay Business Journal.
Lary began advising our company when we were going through some difficult challenges, and now, two years later, we are in a completely different and significantly better place. His advice was specific, direct, and not always what we wanted to hear, and that was invaluable. Lary has been quick to cut through to the heart of an issue. His coaching, prodding, and tough questioning helped us to make changes that truly and measurably have helped both our top and bottom lines.
Paul Levitan, CEO Galaxy Desserts, Inc.
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