ROI: Number One Decision Making Metric
ROI, or return on investment, is a performance measure used to evaluate the efficient cost of an investment. This measures how efficiently an investment is performing by comparing its profit against what it costs to purchase.
How to Calculate ROI Return on Investment (ROI)
The rate of return is calculated using the following formula:
Return On Investment = ———— … X 100% (1) — Net Profit Cost of Investment
Benefice Net: This is the revenue generated from the investment minus all the costs involved.
Investment Cost — how much the investment sells for, upfront costs
Interpreting Return on Investment (ROI)
The positive ROI means the investment is a real deal*
Negative ROI:** Means the investment is losing money.
Profitability:** High ROI means more profit on investment.
Factors Affecting ROI
There are a number of factors that could affect ROI on an investment, such as:
-> Dummy: The higher Dummy is lower the maximum ROI
Generating Revenue:** The opportunity for the investment to generate revenue.
Timeframe:** The duration required to recover the investment
Risk Tolerance ─ How much risk you want in the investment
This is because the market conditions: Market and teamwork play essential roles in ROI effect ever known, so they are outside the control of your project team maybe.
ROI in Different Contexts
ROI may be looked at in a number of different investment occasions, including:
Business – Investment should focus on the profit from a new product, marketing plan, or business expansion.
Real Estate — Evaluating the return on investments for property purchases or renovations.
Estimates on investments in stock market stocks, bonds or mutual funds.
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Limitations of ROI
ROI can be a useful measure, but it definitely has some limitations:
1 * Time Value of Money — While there is time value of money in ROI, it doesn’t come directly into play.
Qualitative Factors : sometimes applying qualitative factors in which ROI cannot capture such as brand reputation or customer satisfaction.
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