ROI is one of the most commonly used investment metrics. Payback period reflects capital recovery speed.
⚠ROI does not consider time value of money. For more precise evaluation, combine with NPV and IRR analysis.
What Is ROI?
ROI (Return on Investment) measures the efficiency of an investment. Higher ROI is better. Annualized return enables comparison across different time periods. Payback period shows how quickly capital is recovered.
Investment/annual net return in years. Shorter payback = better liquidity, lower risk.
Annualized Return
Converts total ROI to yearly average for comparison across investments of different durations.
Investment Decision
Generally, ROI should exceed risk-free rate (e.g., treasury yield). Higher ROI typically means higher risk.
Teaching Example: Invest $500K in a store, $120K annual net return for 5 years. Total=$120×5=$600K. ROI=(600-500)/500×100%=20%. Payback=500/120=4.17 years. Annualized=(600/500)^(1/5)-1=3.7%.
Applications
Business StartupProject InvestmentStock AnalysisAsset AllocationReal Estate
Frequently Asked Questions
How to calculate ROI?▼
ROI = (Total - Investment)/Investment×100%. $500K store, $120K/yr for 5yr: ROI=(600-500)/500=20%.
How to calculate payback period?▼
Payback = Investment/annual return. $100K investment, $25K/yr = 4 years. Shorter is better.
What does negative ROI mean?▼
Loss: total return < investment. Evaluate stop-loss or improvement. Short-term negative OK for startups.
ROI vs annualized return?▼
ROI = total over full period. Annualized = average yearly return for cross-period comparison.
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