ROI Formula

Variables

Step By Step

1. 1

   List the four cash inputs: initial investment, any upfront benefit, the recurring annual net benefit, and the residual value recovered at the end.

   Initial Investment = 50,000, Upfront Benefit = 0, Annual Net Benefit = 14,000, Analysis Years = 5, Residual Value = 8,000

2. 2

   Sum the total nominal inflow: upfront benefit plus annual net benefit multiplied by the analysis years plus residual value.

   0 + 14,000 x 5 + 8,000 = 78,000 total inflow over the 5-year window.

3. 3

   Subtract the initial investment to get total net gain, then divide by the initial investment for Simple ROI %.

   (78,000 - 50,000) / 50,000 x 100 = 56.0% simple ROI; the annualized figure compounds to 9.30%.

4. 4

   Re-run with a lower annual net benefit or a zero residual value to see how sensitive the ROI is to your most uncertain assumption.

   Dropping residual value to 0 cuts total inflow to 70,000 and simple ROI to 40.0%.

Worked Example

ROI sample case

Total nominal inflow = 0 + 14,000 x 5 + 8,000 = 78,000. Simple ROI % = (78,000 - 50,000) / 50,000 x 100 = 56.0%. Annualized ROI % = (78,000 / 50,000)^(1/5) - 1 = 9.30%.

The calculator lands with simple roi percent at 56.0% and annualized roi percent at 9.30%.

Common Variations