This ROI calculator estimates the return on investment by considering the initial cost/investment and the total revenue generated/ so called final balance account. There is in more information about this indicator and its formula below the tool.
How does this ROI calculator work?
In finance, ROI is the abbreviation for the return on investment which is a financial indicator many investors look at before deciding whether to invest or not in some assets, projects, buildings, deposits or businesses. In other words ROI evaluates the efficiency of an investment and together with some other measures of the associated risks, this can be used to compare two or more opportunities.
Its formula says that in order to determine the return on investment percentage you should divide the return (gain or loss) of an investment by the cost of the investment (initial plus regular/occasional cash outs).
It is usually expressed as a percentage and requires a close attention to details in the process of the calculation even though its formula may seem very simple and facile. This is because any mistakes in using wrong figures may alter its relevance. For instance:
- Please try not to avoid any hidden costs of the investment. Consider, assess and acknowledge all the associated costs of the business. Any unknown cost or expenses may afterwards impact the rate of return on investment, so that at the end you may get surprised by the actual results than the forecasted ones.
- Try not to over appreciate the final return the investment will generate, thus you need to have a realistic approach when estimating its outcome.
The algorithm behind this ROI calculator applies the formula explained below:
ROI = [(Total Returned Amount - Investment Cost) / Investment Cost] * 100.
Example of a calculation
Assuming that an investor analyses the opportunity to start an online project that is expected to cost in implementation $100,000.
The business will generate the following cash flows over the next 5 years period:
- 1st year: $17,000
- 2nd year: $28,500
- 3rd year: $35,000
- 4th year: $40,000
- 5th year: $30,000
So the total return is the amount calculated by adding the annual revenues: $150,500.
Then ROI is [(150,500 – 100,000)/100,000]*100= 50.5%.
The ROI levels interpretation:
Higher ROI means higher profits, but please take account of the fact that in most cases higher profits indicates a high risk associated with the investment too.
Usually investors are searching for opportunities that can ensure a ROI level above the average interest rate of a simple or compound interest deposit.30 Mar, 2015