Calculate the return on investment (ROI) to measure the profitability of your investments. Compare different investment opportunities.
ROI measures the profitability of an investment as a percentage. A positive ROI means profit, while a negative ROI indicates a loss.
Given: You bought shares for $5,000 and sold them later for $6,250.
Solution:
Initial Cost = $5,000
Final Value = $6,250
Net Profit = $6,250 - $5,000 = $1,250
ROI = ($1,250 / $5,000) × 100% = 25%
Given: You purchased a rental property for $200,000 and sold it 5 years later for $280,000.
Solution:
Net Profit = $280,000 - $200,000 = $80,000
ROI = ($80,000 / $200,000) × 100% = 40%
Annualized ROI = (1.40)1/5 - 1 = 6.96% per year
Given: A business invests $50,000 in new equipment, generating $12,000 in additional profit per year for 4 years.
Solution:
Total Returns = $12,000 × 4 = $48,000
Net Profit = $48,000 - $50,000 = -$2,000
ROI = (-$2,000 / $50,000) × 100% = -4%
This investment resulted in a small loss.
Given: A company spends $10,000 on marketing and generates $45,000 in sales from it.
Solution:
Assuming 30% profit margin on sales:
Profit from Campaign = $45,000 × 0.30 = $13,500
Net Profit = $13,500 - $10,000 = $3,500
ROI = ($3,500 / $10,000) × 100% = 35%
Given: Compare Investment A ($1,000 to $1,500 in 1 year) vs Investment B ($5,000 to $6,500 in 3 years).
Investment A: ROI = 50% | Annualized = 50%
Investment B: ROI = 30% | Annualized = 9.14%
Conclusion: Investment A has better annualized return, though Investment B generated more absolute profit ($1,500 vs $500).
Return on Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment. It directly measures the amount of return on a particular investment, relative to its cost.
The annualized ROI formula accounts for the time period of the investment:
Where n is the number of years. This allows you to compare investments held for different periods.