Compare Investment Plans by Accounting for Cash-Flow Timing

Summary

The question compares two monthly investment plans under an assumed monthly compound return and asks whether contributing less can produce a better result. The response explains that the apparent difference comes from the way “profit” is calculated: contributions arrive at different times, so simply comparing total profit does not fairly measure the investments’ performance. Net present value offers a more suitable comparison when cash flows occur on different dates, while internal rate of return provides a rate-based measure that accounts for those contributions.

The answer says both plans have the same internal rate of return under the stated assumption. It does not inspect or verify the spreadsheet, specify an NPV convention, or discuss whether the assumed return is realistic or guaranteed. Its lesson is about comparing cash-flow streams consistently; it does not imply that smaller contributions are inherently more profitable or recommend an investment strategy.

Key ideas

• Profit totals can mislead when investment contributions occur at different times.
• Net present value can help compare plans with different cash-flow schedules.
• Internal rate of return accounts for the timing of contributions.
• The answer does not validate the spreadsheet or assess the assumed return.

Tags

# What is wrong in my investment calculation


# What is wrong in my investment calculation












I am thinking to start investing monthly and i am trying to calculate my investment using excel with a compound interest of 5% monthly plus addition of certain amount.

First month investment is 10000 and from second month onwards i add monthly certain amount (1000/month or 5000/month).

But I am getting this weird result (spreadsheet attached)

if I invest 1000/month (sheet 1) after 3 years I get 3.39 times more profit comparing to 5000/month (sheet 2) which was just 2.8.

Assuming my calculation are not wrong, is it better to invest only a small amount monthly.

## Answer by phdstudent (score 1)

https://quant.stackexchange.com/a/18881

The problem is the way you compute profit, in which you are not accounting for the timing of cashflows.

If you compute NPV's you get a better comparison. Also if you check the IRR, it will be 5% for both investments.

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