Motivation

Calculating Returns on Investment

By definition, Returns on Investment (ROI) is a performance measure used to assess the proficiency of an asset or relate the productivity of different investments. ROI attempts to directly measure the amount of returns on a particular investment, with direct relation to the cost of investment. In calculating ROI, the benefit (or returns) on an investment is divided by the cost of the investment. The result is hence expressed as a percentage or a ratio.

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“Current Value of Investment” is defined as the proceeds obtained from the sale of the investment of interest. Since ROI is measured as a percentage, it can be conveniently compared with returns from other investments, giving allowance to compare different investments against one another.

One limitation of ROI is the way it compares with other forces of investment in an extended period. ROI can be used in conjunction with the Rate of Return, which takes into account a project’s time frame.

One may also use Net Present Value (NPV), which accounts for differences in the value of money over time, due to inflation. The application of NPV when calculating the rate of return is often called the Real Rate of Return. With ROI, it may be difficult to know what investment opportunity will profit the investor over a long period like two or three years.

Categories: Motivation

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