Return on Investment (RoI)
Return on Investment (RoI)
In project management and business, it’s important to measure whether the money spent on a project or investment brings back more value. One of the simplest and most widely used ways to do this is through a metric called Return on Investment, or RoI. This metric helps stakeholders understand whether the time, money, and resources spent on a project are truly worth it.
What is Return on Investment (RoI)?
Return on Investment (RoI) is a performance metric used to evaluate the efficiency or profitability of an investment. It shows how much return or profit you have made compared to the amount you invested. RoI is usually expressed as a percentage, which makes it easy to compare across different investments or projects.
RoI is a simple and effective way to understand the benefit gained from an investment. A positive RoI indicates a profitable investment, while a negative RoI shows a loss. The higher the RoI, the better the return. In project management, RoI can help decide whether to start, continue, or stop a project.
RoI Formula
The basic formula to calculate RoI is:
RoI = (Net Profit / Investment Cost) × 100
Where:
- Net Profit = Total Return – Investment Cost
- Investment Cost = The total amount spent on the project or investment
Uses of RoI
- To evaluate the financial success of a project
- To compare multiple projects or investment options
- To support data-driven decision-making
- To justify budgets and future investments
- To measure performance over time
Examples
Example 1
A company invests ₹100,000 in a marketing campaign and gains ₹150,000 in return. The net profit is ₹50,000.
RoI = (50,000 / 100,000) × 100 = 50%
This means the marketing campaign had a 50% return on investment.
Example 2
An IT company spends ₹2,00,000 to build a software tool. After release, it generates revenue of ₹2,60,000. The net profit is ₹60,000.
RoI = (60,000 / 2,00,000) × 100 = 30%
This indicates a 30% return on the software investment.