Example of return on investment calculation

Return on investment calculations is fast becoming a common word in boardrooms and on a closer look, this does not come as a surprise. Simple logic will explain to every business owner or CEO that the easiest way to remain profitable and insolvent is to make all the money they can and let out nothing except if it is with a promise of bringing in more money. In other word, the most valuable technique by business owners is to spot opportunities where money can be release to bring in more. Return investment calculations precisely help cooperation do that, the size of the business does not matter. And the project at hand does not matter either, if it’s to know how much one can earn from an investment, training or any other venture, return on investment calculation is the tool for the job.

For anyone who has work on a variety of projects, it will be clear that return on investment calculations does not have a one size fit all. There is always a need to tweak a formula that is just right for the job at hand, if the right result is to be expected. But across board, there are universal factors that come in to play. These factors determine success or errors in these calculations on returns on investment. A few of these are given below;

- IDENTIFYING THE VARIABLES:

These refer to the factors or indices that do not have a fixed value. They are dependent on so many other factors and the value placed on each of these variables change as the project changes. For example, one variable important to the return on investment calculation on real estate is rural urban mobility, this factor may play a role in the return on investment calculations in another project such as the number of shares bought from a burger company, but the weighted value will definitely not be as decisive as it will be for the real estate investment.

- IDENTIFYING THE CONSTANTS:

These are about the factors that remain relatively stable, and whose value is meant to remain stable for a long time. For instance, when calculating the return on investment on education, a constant might be the society demand for highly specialized skills, not that there no fluctuations to this demand, but overall it can be taken as stable without any harm done.

THE CALCULATONS OF RETURN ON INVESTMENT

The return on investment calculation is most times presented as a ratio with the simple formulae     

  ROI% = 100* (benefits – cost)/costs

The formula is pretty straight forward, what is not so straight forward is determining the actual value of variables such as ‘benefits’. The definition of this is not workable across board that is why the calculation of return of investment in such areas where the variables are ambiguous is multi sector. Each affected unit should be represented to give a result that factors in all the important issues and thus as representative of reality as possible.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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