Return on Investment (ROI) is a business term for a way to measure how profitable an investment is. It compares the amount of profit or return an investment makes to how much it cost to make the investment.
ROI is used to figure out if a project or business is financially viable. It is also used to measure how profitable different purchases are compared to each other. When the return on investment (ROI) is positive, the investment is profitable. When the ROI is negative, the investment is not profitable.
ROI can be affected by many things, such as the cost of the project, the benefits of the project, and how long the investment will last. When figuring out the return on investment (ROI) of a project or investment chance, it’s important to think about everything.
ROI is a key metric for making business decisions, and project managers often use it to support spending money on a project or to compare different project choices. ROI should be determined and thought about along with other project measures like payback time, net present value, and internal rate of return.
The formula for ROI is:
ROI = (Gain from Investment – Investment Cost) / Investment Cost.
For example, if a purchase costs $10,000 and brings in $12,000, the return on investment (ROI) would be:
ROI = ($12,000 – $10,000) / $10,000 = 0.2 or 20%
This means that you get back 20 cents for every dollar you put in.
Key Points
– Return on Investment (ROI) is a method of calculating the profit or value obtained from an investment.
– It computes the ratio of an investment’s net profit or benefits to the cost of that investment.
– It basically informs you if an investment is worth the money and work you put into it.
– ROI in project management evaluates the efficiency and success of a project by comparing the benefits or profits to the expenditures involved.
– It aids decision-making by analyzing if the benefits of a project outweigh the initial cost.
– A larger ROI indicates that the project is more lucrative, whilst a lower one may suggest that it needs to be reevaluated or adjusted.
– It’s an important statistic for determining if a project is producing the projected value and whether the business should invest in it.
