Wednesday, December 27, 2006

ROI Calculation

Saw an interesting video presentation on BNET (www.bnet.com) named “Calculating ROI”.

What is ROI?

It is an analysis tool to compare the expected benefits of a project against the costs.
Its purpose is to help calculate if / when a project will turn £ into £££.

To reliably use ROI you need to have certainty in both the costs involved and the benefits to be achieved.

The simple ROI calculation can be expressed as:

ROI =
return / investment

An interesting point raised in the presentation was that of remembering to include Cost of Capital (http://en.wikipedia.org/wiki/Cost_of_capital) in the calculation.

So for example if the return is estimated at £250,000 over 3 years the actual return after factoring in Cost of Capital could actually be £215,000.

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