1. What is External Rate of Return?

The External Rate of Return (ERR) is a financial metric used to evaluate the profitability of an investment by comparing the future value of benefits to the present value of costs over a specific time period.

2. How Does the Calculator Work?

The calculator uses the ERR formula:

Where:

• \( FV_{\text{Benefits}} \) — Future value of benefits (currency)
• \( PV_{\text{Costs}} \) — Present value of costs (currency)
• \( n \) — Number of years

Explanation: The equation calculates the annualized rate of return by comparing the growth of benefits relative to costs over time.

3. Importance of ERR Calculation

Details: ERR is crucial for investment analysis, capital budgeting decisions, and comparing different investment opportunities. It helps determine whether an investment meets the required rate of return.

4. Using the Calculator

Tips: Enter future value of benefits and present value of costs in currency units, and the time period in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How is ERR different from IRR?
A: ERR uses external reinvestment rates while IRR assumes reinvestment at the internal rate, making ERR often more realistic.

Q2: What is a good ERR value?
A: This depends on the industry and risk, but generally an ERR higher than the company's cost of capital indicates a good investment.

Q3: Can ERR be negative?
A: Yes, a negative ERR indicates that the investment's benefits don't cover its costs over the time period.

Q4: What are the limitations of ERR?
A: ERR doesn't account for cash flow timing within the period and assumes constant growth rate.

Q5: How should I interpret the ERR percentage?
A: The percentage shows the annualized return on investment. Compare it to your required rate of return or alternative investments.