How to Calculate an Initial Investment

How to Calculate an Initial Investment
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An original investment calculator is a tool to help individual or business investors determine the amount of money to place in a given investment in order to achieve their financial goals. To decide what initial investment you want to make in dollars, you must first think about what you hope to achieve and explore some scenarios to consider whether that investment is likely to help you achieve that goal. You can then use the initial cost formula or initial investment formula to make concrete goals.

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Setting Financial Goals

Different types of investment, such as investing in stocks, acquiring a rental property or placing funds in a CD (certificate of deposit), will yield different returns with different levels of security, and tools that calculate the likely profitability of a given investment can help guide you in reaching an advantageous financial position.

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Calculating your likely return on investment, or ROI, begins with understanding what you hope to achieve through investing. A solid principle to consider is the adage "a dollar today is worth more than a dollar tomorrow." According to the Financial Industry Regulatory Authority (FINRA), inflation has averaged about ​3 percent​ each year, meaning that you want to seek investments that will offset the cost of inflation and either maintain or increase the total value of your assets.

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Consider also:Investing Through Your 50s

Types of Financial Goals

Financial goals typically fall into three categories: long-term, medium-term and short-term. Each requires a different kind of goal-setting, and many investment choices focus specifically on long-term goals.

An example of a short-term financial goal might be saving enough money to fix the foundation of your house, while a long-term goal might be to pay off your mortgage or ensure your financial stability in retirement. In all cases, though, you should make what the government's Consumer Finance advocacy group calls SMART financial goals, or those that are specific, measurable, attainable, relevant and time-bound.

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Initial Investment Calculator

The formula for an initial investment calculator with compound interest is F = P (1 + i)n, where ​F​ represents the future amount of money, ​P​ the present dollar amount or initial investment, ​i​ the annual interest rate (expressed as a decimal) and ​n​ the number of years the initial investment will be paying interest. Therefore, if you start with an initial investment of ​$1,000​, at an annual interest rate of ​5 percent​, the value of the investment after ​10​ years will be ​$1,628.89​.

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If you wish to start with a desired ​F,​ you can flip the formula to be P = F / (1+i) n. If your goal is to have ​$2,500​ (F) after 10 years (n) at an interest rate of ​5 percent​ (i), you must begin with an initial investment of ​$1,534.78​.

Initial Investment Calculator Utility

An initial investment calculator for IRR and an initial investment calculator for NPV can also help clarify how you hope to spend your money. IRR, or internal rate of return, helps you to calculate the interest rate (also known as a discount rate) you would need to see on a given investment in order to break even. NPV, or net present value, lets you know how much your future money will be worth, based on a given rate of return.

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Both of these tools can help you compare different investment opportunities to decide which works best for you. Microsoft Excel contains native tools that will calculate NPV and IRR directly in an Excel spreadsheet. A tutorial for how to use these Excel functions can be found at Microsoft's Support website.

Consider also:How to Calculate the Return on Initial Investment of Preferred Stock

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