Return on investments (ROI)

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We consider ROI: how to define attractiveness of investments in the project

ROI (Return On Investment, investment payback) is one of the most discussed corporate terms which many specialists like to repeat here and there.

However there is an impression that in his understanding often there is a frank confusion. Quite often at the presentation of new projects speakers say the overestimated investment payback indicators calculated arbitrarily.

At the same time, there is a checked method by which it is possible to define ROI precisely. Therefore if you on the way to the Nobel Prize on quantum physics accidentally did not invent a new method of calculation of an investment payback, it is better to use already available.

There are key indicators of which there is ROI:

Net current value ($)

Than this indicator is higher, especially the investment project is attractive. It covers profit volume — expressed in the current prices — which is received by the shareholder after return of cost of investments. The project with the net current value of $2 million is more preferable, than with $1 million.

Internal rate of payback (%)

This indicator reflects an investment payback as a percentage – if it is necessary to pay 10% and as a result it is possible to receive 15%, it is the good transaction. However as keyword parameter it is better to use the net current value, but not an internal rate of payback. 20% of $50 thousand will not be better, than 15% of $500 thousand.

Payback period (in months)

The time frame which will be required for compensation of initial investments is an indicator of riskiness of the project – what your money will longer return, especially risky it is possible to consider the project with other things being equal.

Calculate these indicators does not represent work especially as the guide to calculations can be found in any input textbook on finance or on the Internet, and spreadsheets will help with calculations.