5

No accounting experience here.

The problem: Man A invests $10 on day 1. Man B invests $5 on day 4. Man C invests $85 on day 5.

On day 7, the $100 returns 10%. How do you fairly distribute it?

7

This sounds like an investment club. Assuming the securities being purchased can be easily valued at each point of purchase (e.g. if they are public securities being purchased), then you can use a unit valuation system. See Wikipedia - Unit Valuation System: "UVS is a time weighted performance metric".

Then calculating the rates of return for A, B, and C would be based on their respective unit holdings and purchases. You could use IRR on each set.

2

It depends on the arrangements made at the time of each investment. Who set it up and what provisions did they make? In a short timeframe like your example, the arrangements may be simple, like 1 share of ownership for each $5. Then, on day 7 there are 20 shares, so that man A gets 2/20ths of the distribution, B 1/20th, and C 17/20ths.

If the timeframe were years, then different arrangements would probably be made because the value gained by the $10 over the first 3 years might be significant. The obvious way to account for this is that the cost of a share would be different for B than A. If A got 2 shares by putting in $10, but the worth of the investment in year 4 is $20, then B maybe would get only 0.5 shares. Later, say C gets 6.5 shares for his $85. Then there are a total of 9 shares, and distributions would be 2/9ths for A, 0.5/9th for B, and 6.5/9ths for C.

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