Toofuzzy, the interesting thing about looking at investment gains for a Variable Investment Base(VIB) is that there are various ways for calculating the gain. Using your method . . .you are looking forward from a known VIB. . .of 7%/yr simple interest can be calculated as:
C1 = 20000/2*(1+0,07)*2 = 2140. . .that is fair if the Average invested capital = 20000
C2= 20000*(1+0,07)^2 = 22898. . .that is fair if the Start capital = 20000
C3 = 20000*(1+ 0,07/12)^24 = 22996. . .is fair for compounding monthly;
C4 is en Explosive !
C5 = 20000*(1,00019165)^365,25 = 23005. . . is fair for compounding daily;
C6 =~ 20000*e^(0,07*2) = 23005,47603 . . . is fair for compounding every second!
<<But if you take the gain $2,898 / by the 2 years= $1449 then divide the $1449 / $20,000 = 7.245%
which is a higher return which only gets higher if done over a greater number of years. I don't feel this is a fair way of looking at returns. >>
If this is done using the Internal Rate of Return for any investment that is 20000 average (or constant) for the 2 years then it is certainly fair because the rate of Return = 14,49% over the 2 years, years based on simple interest.
The IRR Method reduces a VIB to a ficticious average investment base that is assumed to create the equity gain.
This IRR Method can be used on staged capaital injections such as for example a $ 500/month Inlay Program for an investment, or for a completely arbitrary Inlay Program with different amounts injected at irregular times during the Investment Period. This would be the ROTAC Method. If you look at time based equity purchases this would be the ROTAI Method.
As long as you use a calculation for a yield method that closely resembles what is happening for you, then that method is fair.
