Why Do We Need ROI to Decide on an Investment?

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Return on investment is an essential calculation in order to evaluate outcomes on investments. And, even now you can compare your investments with other types of investments. ROI plays a key role in deciding the amount of investment a business should receive or not.

ROI calculator enables us to know the expected profit or loss in our investments. Decide investment pattern and return on investments by the ROI calculations.


Lets go and learn the importance of the ROI for our business!


In simple terms, ROI is an ideal way to interpret your investments and choose the best kind of the investments. ROI calculator helps managers to recognize what is the best path to follow and which investment does require more investment and where they need to cut down our investments.


This term is most common in the businesses as we are dividing the profitability of the investments by the total cost of investments. The result is represented in the form of a ratio which is best to analyze your %age return on your investments.

Formula of ROI:

Investors may be in total disarray, if they are not able to find how to calculate ROI. Well, we are to make things easier for your by providing best ROI (Return on Investment) formula:


The simple formula for ROI is as follows:


ROI= Net return InvestmentsCost of Investments 100%

Second method:

ROI= FVI-IVIIVI 100%

Where:

FVI= Future value investments

IVI= Initial value investments


When we are finding ROI over a period of 12 months, then we call it Annualized ROI, an annualized return calculator automatically able to find ROI over a period of 12 months.
Practical Examples of ROI:

Example 1:

As an investor in the real estate market, you have purchased a Property of $ 600,000 in California and after 2 years you sold the property $ 900,000.


So, how to calculate return on investment here, simply put the values in the ROI calculator and let it proceed with precise calculations. You can even attain the manual ROI calculation with the assistance of formula:

ROI= {($ 900,000 - $ 600,000)/($ 600,000)}100%= 50 %

Quit worrying since a return on investment calculator can also do the calculation in the same way.
Example 2:


You're working as marketing manager in a large international company, you have started the company with an initial budget of $50,000. The result of this program is $ 100,000 growth in profit margin over each of the following two years.


First, find the investment in the first two years that assists you to calculate return on investment.

So to find FVI= $ 100,000+ $ 100,000= $ 200,000

Here IVI= $50,000

ROI=($ 200,000- $50,000)/ ($50,000)= 0.75 1/100= 75%

Annualized ROI:

This provides us the time that we have invested, which is indicated as the holding time for our investments.

Annualized ROI=[(1+ROI)1/n-1]100%


Where:

n= Number of the years the investment held during the project.


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ROI and Financial Decision Making:

ROI is useful in making a profitable decision for our businesses, average rate of return on investments is taken as to find is it feasible for us to invest in a certain business or not. It is almost essential to do the initial ROI analysis against the following estimation.


In general the what is a good return on investment is calculated as follows:

ROI LV : Investment is profitable

ROI < LV : investment is unprofitable

Where LV is predefined limit values to calculate annual return on investment

For simplicity to find what is a good return on investment?

ROI ≥ 0 – investment is profitable

ROI < 0 – investment is unprofitable

Calculate annual return on investment ≥ 0 is considered as a profitable business in the first year of the business.

. In this case, the criterion should be like that:

ROI ≥ WACC = investment is profitable for the time being


ROI < WACC = means that investment is unprofitable (not acceptable)
Conclusion:

ROI calculator is a simple and intuitive metric to find the probability of return on our investments. There are some limitations of the ROI investments as it doesn’t consider the holding period of an investment. The rate of return calculator is an easy-to-use business analysis source that helps to predict expected ROI.

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