This **return on investment calculator** estimates the **rate of return** (ROI) by 2 different methods that consider the cost and the gain of the investment. There is in depth information on how to approximate this financial indicator below the form.

## How does this return on investment calculator work?

This financial tool determines the rate of return percent which is an important figure any investor is looking at before deciding to go invest in a new or existing business or opportunity:

- By 1st tab named “ROI Method 1” it takes account of the total cost of the investment and its total gain, while it applies the following formula:

Return rate (%) = [(Total gain– Total cost) / Total cost] * 100

- By 2nd tab named “ROI Method 2” it considers the income generated by the investment, its ending value and its beginning value, while applying the following rate of return equation:

Return rate (%) = (Income obtained + Investment’s ending value – Its beginning value) / Its beginning value

This *return on investment calculator* may help financial experts or investors in any situation such as:

- Simulate and forecast a potential profit from an investment based on a “what if” scenario;
- Compare between multiple investment plans;
- Analyze an investment plan by comparing it with a fixed deposit or with a savings account with regular contributions.
- Decide whether to keep current business or start a new investment.

## Understanding the concept of return on investment

In finance theory, the return on investment represents the gain or loss an investment may generate over a given period of time. It is usually written in the form of a percentage increase (proportion) applied to the initial (overall) cost for the investment.Thus is it considered to be a profitability indicator enough relevant both in the early stages when an investor is analyzing the opportunity, or when an investor is assessing the progress so far by comparing the initial scenario with the actual one. As it can easily be observed the rate of return does not take account of the risk profile of the investment, which means this aspect should be treated and assessed separately.

The usability of the return on investment is high as it can used to measure almost any investment type. For instance it can be used to test the profitability of bonds and stocks, deposits, savings accounts or even real estate business.

The higher the proportion of the return on investment is the better is as it demonstrates that an investment is attractive.

## Example of two calculations

Case 1: By using 1^{st} method let’s assume a total cost of investment of $100,000 and a total gain of $155,000, which will generate a Return on Investment (ROI) = 55.5%.

Case 2: In the 2^{nd} tab let’s consider the following:

- initial valuf of the investment = $500,000

- ending value = $350,000

- income returned by the business = $400,000. Will result in a rate of return of 50%.

16 Feb, 2015 | 0 comments
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