Let’s say we have scenario where we know how much we have for investment, how much we expect and how many years we can keep the investment for?. Depending on these parameters we need to find out at what rate our investment will grow. Below figure ‘rate in action’ shows the same in a pictorial format. We need to use ‘rate’ formula. In the below scenario we are investing 37907 INR (this is nothing but the PV) for 5 years and we are expecting a return of 610 51 INR (this is the FV). One of the points to be noted is the negative PV value. As said previously any fund flowing outside should be marked as negative. So we conclude that the growth rate is of 10%.
Figure: - Rate in action
If you see the above figure there is one more parameter i.e. guess. Guess allows you to give some type of guess for a rate. This is not a required argument. If you omit it takes a value of 10 percent.
Note: - Till now all the above calculation of rate, PV and FV are done on the assumption that we have an even cash flow. We can not use the above formula in scenarios where we have uneven cash flow. The coming question will target more on how to handle unequal cash flow calculations.