Greetings,
Why is it that Future Value calculations don't seem to handle weighted average rates of return very well? I notice this both in FireCalc and Excel.
For instance:
The future value of $400,000 @ 10% annual rate of return for 30 years is $6,979,760.91.
The future value of $400,000 @ 5% annual rate of return for 30 years is $1,728,776.95.
The sum of these two future values is $8,708,537.86.
However, if we combine these initial amounts at the get-go and use an average annual rate of return, the result is different. The future value of $800,000 @ 7.5% annual rate of return for 30 years is $7,003,964.15!
What is funny about this is that if I look at this on a year over year basis, the returns are identical:
........................Year 1...Year 2....Year 3....Year 4....Year 5
$400000 @ 10% $ 40,000 $ 44,000 $ 48,400 $ 53,240 $ 58,564
$400000 @ 5.0% $ 20,000 $ 22,000 $ 24,200 $ 26,620 $ 29,282
................Total $ 60,000 $ 66,000 $ 72,600 $ 79,860 $ 87,846
$800000 @ 7.5% $ 60,000 $ 66,000 $ 72,600 $ 79,860 $ 87,846
As such, in FireCalc, how does one account for the future value of different asset classes that have unique rates of return, without using a weighted average that is seemingly inaccurate?
Thank you
Why is it that Future Value calculations don't seem to handle weighted average rates of return very well? I notice this both in FireCalc and Excel.
For instance:
The future value of $400,000 @ 10% annual rate of return for 30 years is $6,979,760.91.
The future value of $400,000 @ 5% annual rate of return for 30 years is $1,728,776.95.
The sum of these two future values is $8,708,537.86.
However, if we combine these initial amounts at the get-go and use an average annual rate of return, the result is different. The future value of $800,000 @ 7.5% annual rate of return for 30 years is $7,003,964.15!
What is funny about this is that if I look at this on a year over year basis, the returns are identical:
........................Year 1...Year 2....Year 3....Year 4....Year 5
$400000 @ 10% $ 40,000 $ 44,000 $ 48,400 $ 53,240 $ 58,564
$400000 @ 5.0% $ 20,000 $ 22,000 $ 24,200 $ 26,620 $ 29,282
................Total $ 60,000 $ 66,000 $ 72,600 $ 79,860 $ 87,846
$800000 @ 7.5% $ 60,000 $ 66,000 $ 72,600 $ 79,860 $ 87,846
As such, in FireCalc, how does one account for the future value of different asset classes that have unique rates of return, without using a weighted average that is seemingly inaccurate?
Thank you
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