How to Calculate Return On Investment

by braniac; Updated September 26, 2017

Calculating return on investment (ROI) is a relatively simple calculation to perform. It is best used to estimate how effective money spent by a business or individual results in net profit. This way investors or the business owners can predict different ways of improving a business. The alternative with the highest return on investment is generally a good prediction for planning the direction to take with additional investment in the business. This article will show you the steps in calculating a return on investment.

Step 1

Estimate the gains that will be realized from the additional investment. Include any estimated sales increase, gain through efficiency, stock value increase, and overall increase in business net worth. Add these amounts together and call this total the "Gain from Investment".

Step 2

Estimate the true cost of the investment. This amount should be the total including the amount of the investment, interest cost, loss of efficiency, increased overhead or labor costs, increased taxes, stock value decrease, and decrease in business net worth. Add these amounts together and call this total "Cost of Investment".

Step 3

Calculate the projected net profits after taxes. The calculation is simple. Take the "Gain from Investment" - "Cost of Investment". The difference result is the projected "Net profit after Taxes".

Step 4

Calculate the return on investment (ROI) by using the following formula:

"Net profit after taxes" / "Cost of Investment" = "Return on Investment"