- Return on investment (ROI) is income divided by investment
- ROI = (total discounted benefits – total discounted costs) / total discounted costs
- ROI provides the percentage return expected over the life of the project.
- The higher the ROI or higher the ratio of benefits to costs, the better.
- Many organizations have a required rate of return or minimum acceptable rate of return on investment for projects
- Example: using the figures in NPV example
Step 1: determine discount factor for each year.
Step 2: calculate discounted benefits and costs
- ROI Project 1 = ($436,000 - $367,100) / $357,100 = 19%
- ROI Project 2 = ($335,000 - $256,000) / $256,000 = 31%
- If you must choose one project over the other, then choose Project 2, which has the higher ROI.
francis1897 answered the question on
March 13, 2023 at 08:57