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This investment returns calc, which seems to be widely used, explicitly states that contributions are made at the beginning of each period. If I enter:

  • 10 years
  • 7% RoR
  • $10,000 initial investment
  • $1,000 additional investment per year
  • 3% expected inflation
  • 0% tax rate
  • Show all totals after inflation

It generates Year 1 activity of: $970.87 investment, $456.31 return, for an ending balance of $11,427.18

If the contribution is indeed made at the beginning of the period, shouldn't it be as-entered, as $1,000? Since the inflation has not occurred yet.

If I were to run that in a spreadsheet, it would generate Year 1 activity of: $1,000 investment, $427.18 return, for an ending balance of $11,427.18.

The $427.18 = (10000+1000)*((7%-3%)/(1+3%))

So the end balances match but the underlying elements differ. Which is correct and why?

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The year 1 figures appear to be all end-of-year figures, as if the interest is being applied to depreciated investments, i.e.

(1+7%)*(9708.74 + 970.87) = $11,427.18

enter image description here

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  • OK, so they are taking each element as of "December 31" and then applying the nominal RoR. But how are they calculating the $456.31 - backing into it? Shouldn't it be (9708.74+970.87)*(7%) Back to the question, is my original approach "correct" or is theirs - or are each of these fair and equally "correct" alternatives?
    – Dylan
    Commented May 28 at 13:23
  • Hi, it looks like it's being incorrectly calculated like this: (10000 + 1000)*(1 + 0.07)/(1 + 0.03) - (10000 + 970.87) = 456.31
    – Chris Degnen
    Commented May 28 at 13:51
  • Thanks. So just to finish this off, you wouldn't see anything impoper or incorrect by applying the following approach, assuming beginning of period contributions? Return = (10000+1000)*(7%-3%)/(1+3%) = 427.18 and End Balance = 10000+1000+427.18=11427.18
    – Dylan
    Commented May 28 at 18:58
  • Although the results are the same, as I previously posted here, it is clearer to me to apply the 7% interest then depreciate by the 3% inflation, so End Balance = 11000*(1+7%)/(1+3%) = 11427.18 then Return = End Balance - 11000 = 427.18
    – Chris Degnen
    Commented May 28 at 20:23
  • I guess I can't upvote yet but thanks much
    – Dylan
    Commented May 29 at 13:59

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