How ROI Is Calculated
ROI = (Final Value - Initial Investment) / Initial Investment x 100. Net Profit = Final Value - Initial Investment. Annualized ROI uses the compound annual growth rate formula: (Final Value / Initial Investment)^(1/years) - 1. Payback Period = Initial Investment / Annual Net Return (assumes linear returns).
Frequently Asked Questions
ROI (Return on Investment) is a measure of how much profit or benefit you received relative to the cost. The basic formula is ROI = (Net Profit / Cost of Investment) x 100. A positive ROI means you gained more than you spent; a negative ROI means you lost money.
A 'good' ROI depends entirely on the type of investment and the risk involved. Stock market indices have historically averaged about 10% annually before inflation. Real estate often targets 8-12%. A business investment might require 20%+ to justify the risk. Low-risk savings accounts may return 4-5%. Compare ROI against your cost of capital and alternative uses of funds.
Annualized ROI converts a total ROI over a multi-year period into an equivalent yearly rate, using the formula: Annualized ROI = (1 + ROI/100)^(1/years) - 1, expressed as a percentage. This allows fair comparison of investments held for different lengths of time.
Payback period is the time it takes to recover the initial investment from the net returns. It is calculated as: Cost / Annual Net Return. A shorter payback period means faster recovery of capital. It does not account for the time value of money.
No. This calculator shows nominal ROI before inflation and taxes. To calculate real ROI, subtract the inflation rate from the return. Tax treatment varies significantly by investment type, jurisdiction, and holding period. Consult a tax advisor for investment-specific tax guidance.
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