There’s an “i” in “Finance Team.”
I used to work with someone who looked forward to the (payoff) day when he could say, “return on, return of” when a commercial mortgage loan his team had originated moved off the funding report.
There is obviously a difference between the two. The “on” refers to return on investment, what others might call IRR: Internal Rate of Return. Personally, I prefer the acronym and like to write it “i(RR)” since it is the true investment yield and because the full name includes the word of (which can be confusing when drawing the distinction between return on investment and return of investment).
Here’s an excerpt from my book Would Your Boomerang Return? What Birds, Hurdlers, and Boomerangs Can Teach Us About the Time Value of Money (2023):
The two most popular return metrics are ROI and i(RR). Think of them as the two most popular in school—they are in business colleges. Have you had the experience of hearing someone’s name and thinking to yourself, With a name like that, so-and-so is destined for stardom? That’s the way I first felt about ROI. The one thing that ROI has going for it is a great name that includes the word on. Three words, none wasted for this investment metric. Investors invest for “return on investment.”
Aside from the cool name, we’ve already discussed how ROI doesn’t consider time. I’m sure you know someone who has no regard for time. It’s annoying. You want dependability and not to be left hanging.
On the other hand, if i(RR) were a person, it would be the one you would want to bring home to meet the parents. Nobody living today is perfect. The same is true for measures to evaluate a potential investment. The shortcomings—yes, you read the plural correctly—for i(RR) will be discussed in the next chapter. But I still love “i(RR),” and so should you. Don’t let the name fool you. ROI has nothing to do with return on investment as we think about true investment yield or “i” in the context of the Time Value of Money.
How would you describe i(RR)—to a friend?
Brent Pritchard is an author and college finance lecturer with over two decades of industry experience and cofounder of Boxholm Press, LLC, a family-owned-and-operated publishing company providing educational content, products, and services. He pioneers an innovative and approachable new way of learning and teaching the Time Value of Money as well as thought leadership in other business topics. His most recent book is Would Your Boomerang Return? You can contact him on his website here.