Financial ROI Calculation

Return on Investment (ROI)

ROI measures the profitability of an investment relative to its cost.

Basic ROI Formula

ROI = ((final_value - initial_cost) / initial_cost) * 100

Example: Bought for $5,000, sold for $7,500:

((7500 - 5000) / 5000) * 100 = 50

That is a 50% return.

Annualized ROI

For investments held over multiple years, the annualized return is:

annualized_ROI = ((final/initial)^(1/years) - 1) * 100

Example: $10,000 grew to $16,000 in 3 years:

((16000/10000)^(1/3) - 1) * 100 = (1.6^(1/3) - 1) * 100

(1.6^(1/3) - 1) * 100 = 16.96

Annualized return of about 17%.

Break-Even Point

How many units to sell to cover fixed costs:

break_even = fixed_costs / (price_per_unit - variable_cost_per_unit)

Example: Fixed costs $50,000, selling at $25, variable cost $10:

50000 / (25 - 10) = 50000 / 15 = 3333.33

Need to sell 3,334 units.

Net Present Value (NPV) Components

Discount a future cash flow to present value:

PV = future_value / (1 + rate)^years

Example: $10,000 in 5 years at 6% discount rate:

10000 / (1 + 0.06)^5 = 10000 / 1.338 = 7472.58

Rule of 72

Estimate years to double an investment:

years_to_double = 72 / rate_percent

At 8% return: 72 / 8 = 9 years to double.

Verify: (1 + 0.08)^9 = 1.999 (very close to 2).