Sign Up for Discounts
This form does not yet contain any fields.
    Follow us on Facebook
    Controller Library Value Pack
    CFO Library Value Pack
    Accounting Standards Library
    Monday
    Mar262012

    What is the time-adjusted rate of return?

    The time-adjusted rate of return is the discount rate that causes the present value of cash inflows associated with an investment to equal the present value of its cash outflows (usually the initial cash outlay and any incremental increase in working capital). The measure incorporates the time value of money, and so is superior to the accounting rate of return, which does not factor in the time value of money.

    The measure is commonly used to develop rate of return information for one or more proposed expenditures for fixed assets. Management may use the measure as one of several deciding factors to select one proposed expenditure over another. Other factors that may impact the decision include the impact on the company bottleneck operation, quality issues, and risk mitigation concerns. Alternatively, any proposed project may be approved, as long as its time-adjusted rate of return exceeds the corporate cost of capital.

    The metric is most easily calculated by using the internal rate of return (IRR) formula in an Excel spreadsheet. Though the calculation is invisible to the user, the formula essentially brackets the likely rate of return, and then uses multiple iterations to back into the exact amount. The metric is significantly more difficult to calculate when future cash flows are uncertain, and especially when they are expected to vary from period to period.

    While the time-adjusted rate of return is a reasonable method for arriving at a quantitative view of a proposed investment, it should be supplemented with other information, such as how the investment is used to increase the capacity of a bottleneck operation, how it can reduce working capital, and/or how it resolves a legal requirement imposed by a local government.

    Similar Terms

    The time-adjusted rate of return is also known as the internal rate of return.

    Related Topics

    Net present value 
    What is the accounting rate of return? 
    What is the incremental internal rate of return? 
    What is the required rate of return? 
    What is the simple rate of return? 

    PrintView Printer Friendly Version

    EmailEmail Article to Friend

    Reader Comments

    There are no comments for this journal entry. To create a new comment, use the form below.
    Editor Permission Required
    You must have editing permission for this entry in order to post comments.