RETURN ON INVESTMENT

The return on investment (ROI) assumes that once all the costs have been recovered for a product, service, and so forth, it can then start generating a profitable rate of return.

To calculate the ROI, some information must be available, such as implementation and operating costs as well as the expected rate of return in the first year. The resulting value is the return on investment for the first year, which is calculated by subtracting the operating and implementation costs from the expected return. The ROI is then calculated for the subsequent years that the product or service will be in effect. The approach is to sum the expected return on investment generated for each year.

The benefits of the ROI are that it helps to determine whether to make the selected investment or to invest it somewhere else.

for Calculating the Return on Investment

• For the first year, calculate the return on investment by subtracting the operating and implementation costs from the expected amount.
  • Example:

    Money Generated in the First Year		$100,000
    Operating Costs	–	20,000
    Implementation Costs	–	50,000
    Return on Investment		$ 30,000

• For each subsequent year in the life of the product, service, and so on, subtract the operating costs from the expected amount of return, if applicable.
  • Example:

    Expected Rate of Return for the First Year		$  5,000 *
    Expected Rate of Return for the Second Year	+	10,000 **
    Expected Rate of Return for the Third Year	+	15,000 **
    Return on Investment		$30,000
    *   Return minus operating and implementation costs
    ** Return minus operating costs

• Determine whether to invest in the product, service, and so on, or to invest the money somewhere else (e.g., bank savings account).