The same multiple can mean a different return.
Annualization expresses a total return as an equivalent constant yearly rate. Tripling an investment in five years corresponds to a higher annualized rate than tripling it in ten.
For one initial outflow and one final inflow, this calculation equals the internal rate of return. Investments with interim distributions or additional contributions require a dated cash-flow IRR model instead.
The formula, made clear.
- Holding period
- Elapsed time measured in years, including fractional years.
- Terminal proceeds
- The only positive cash flow assumed by this model.
Put the numbers in context.
A $1M investment returning $3M after five years has an annualized return of approximately 24.57%.
| Input | Example value |
|---|---|
| Initial investment | $1,000,000.00 |
| Terminal proceeds | $3,000,000.00 |
| Holding period | 5 years |
| Gross annualized return | 24.57% |
What this calculation assumes
Exactly two cash flows; no intermediate distributions or contributions. Gross return before fees, carry and tax. Not a multi-cash-flow IRR or XIRR calculation.
What to consider next.
Use a dated cash-flow model if you receive distributions or invest more capital during the holding period.
How we approach financial models →