Calculating Return On Investment

ROI Formula:

\[ ROI = \frac{(Gain - Cost)}{Cost} \times 100 \]

Return On Investment (ROI):

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1. What is Return On Investment?

Return On Investment (ROI) is a financial metric used to measure the probability of gaining a return from an investment. It compares the magnitude and timing of gains from investment directly to the magnitude and timing of investment costs.

2. How Does the Calculator Work?

The calculator uses the ROI formula:

\[ ROI = \frac{(Gain - Cost)}{Cost} \times 100 \]

Where:

\( Gain \) — Total revenue generated from the investment
\( Cost \) — Total cost of the investment

Explanation: The formula calculates the percentage return relative to the investment's cost.

3. Importance of ROI Calculation

Details: ROI helps investors evaluate the efficiency of an investment or compare the efficiency of several different investments.

4. Using the Calculator

Tips: Enter gain and cost in dollars. Cost must be greater than zero for calculation to work.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROI percentage?
A: A good ROI depends on the investment type and risk. Generally, 7-10% is considered good for stock market investments.

Q2: Can ROI be negative?
A: Yes, negative ROI means the investment resulted in a net loss.

Q3: What are the limitations of ROI?
A: ROI doesn't account for the time value of money or the holding period of an investment.

Q4: How is ROI different from ROE?
A: ROI measures return on total investment, while ROE (Return on Equity) measures return on shareholder's equity.

Q5: Should I use ROI for all investment decisions?
A: ROI is useful but should be combined with other metrics like NPV and IRR for comprehensive analysis.