Definition of Internal Rate of Return
Internal Rate of Return is a way of determining the value of a project. It is simply the discount rate that makes the Future Value of a series of cash flows equal to the Present Value. If you remember the piece I wrote about Net Present Value, we are looking for the discount rate the makes Net Present Value equal to zero. See here for a definition of Present Value, Future Value, and discount rates.
Let’s say a project lasts for 3 years. To initiate the project, you have to pay $20,000. Each year after that the project earns $10,000. The required rate of return (the minimum return you need to do a project) is 15%, should you do this project? The equation would be 0 = -20,000 + (10,000 / discount rate) + (10,000 / (discount rate squared)) + (10,000 / (discount rate cubed)). When you solve this equation with a financial calculator, excel or some other piece of software, the discount rate equals 23%. 23% is larger than 15%, therefore you should do the project.
Investment Fee Structure
|Rate||Assets Under Management|
|1.00%||Between $125,000 and $750,000|
|.85%||Between $750,000 and $1,250,000|
|.80%||Between $1,250,000 and $1,750,000|
|.75%||Between $1,750,000 and $2,500,000|
|.70%||Between $2,500,000 and $3,250,000|
|.65%||Between $3,250,000 and $4,250,000|
A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.
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Questions for the comments
Did my explanation make sense? Do you agree or disagree with what I said?