What Is First Year Rate of Return?

The first year rate of return (FYRR) is a term that is often used to describe the amount of return that is generated during the first year of a specific business initiative, project, or contract. The term is often used to refer to the return after all expenses have been settled that occurs during the first year of the project. In some cases, the first year rate of return is utilized as a means of evaluating the effectiveness of the effort and determining if it will be allowed to continue for another year.

Calculating a first year rate of return involves identifying both the expenses connected with the project under consideration along with the amount of revenue that is generated as the result of that project. The rate of return itself may be positive or negative, since income may exceed expenses, or the income generated may be less than the actual expenses. By determining the first year rate of return, it is possible for project managers to determine if the forward movement of the effort is more or less what was expected, if the project is generating income faster than originally anticipated, or if the effort is failing to generate the projected level of income that was expected for the first year. Based on the outcome of the calculation, the project may be authorized to continue, or plans may be made to incrementally shut down the effort as soon as possible.

When used in the context of an insurance situation, the first year rate of return may focus on the amount of savings that are incurred as the result of a launch of a new process or initiative. Here the goal may not be focused on generating additional revenue per se, but on reducing expenses so that a greater amount of returns are realized from that same level of revenue. For example, if an initiative involves adding benefits that promote health maintenance in some fashion, such as covering a limited new of doctor visits each calendar year, and that initiative greatly reduces the healthcare costs since issues are identified and treated earlier, this would mean the initiate was a success and helped to boost the actual returns during that first year.

It is important to note that even if the first year rate of return is negative, this is not necessarily a sign of failure. Some projects, such as the launch of new product lines, may require more than a single calendar year to recoup the investment in the project even if the products are selling briskly toward the end of that first year. For this reason, business owners, project managers, and others who are involved in the evaluation of the returns related to the project will often view the rate of return within a certain context. Only if the first year rate of return is significantly less than anticipated should a decision to end the initiative be seriously considered.