Average Return on Investment ROI (E)
What is the project? How to select and justify the project? How to plan and execute the project?
Posted: Sep 2010
Average return on investment (ROI) is calculated as a percentage of earnings produced by an asset relative to the amount invested in that asset. The average annual cash flow generated by the investment is divided by the cost of the investment. The formula assumes the cash flow is existing for a defined period of time.
The formula is as follows:
If we take 5 years example, than we can have following situation.
Using the example from the simple payback method of a project „A“ that has an initial investment of €1,000 and evenly distributed cash inflows of €2,000 every year, we can calculate the average return on investment (ROI) of the project.
ROI = € 2000 / € 1000 = 200%
The average return on investment is 200% per year. In other words, the new equipment will return twice the initial investment each year. This looks like a good project to explore further.
Average Return on Investment (ROI):
Expressed as a percentage of earnings produced by an asset relative to the amount invested in that asset. This method also does not take into account the time value of money.
Similar to the simple payback method in that it gives a quick check on whether the project is worth engaging. This is another method that can be used during the earliest stages of the capital budget, when the company is selecting the projects.
Continue on Project Management:
1. Project Management Overview
2. 9 Areas of Project Management
3. Project Lifecycle – 5 Stages of Project
4. How to Determinine a Value of the Project?
4.1. Simple Payback
4.2. Average Return on Investment (ROI)
4.3. Net Present Value (NPV)
4.4. Internal Rate of Return (IRR)
4.5. Cost/benefit analysis
4.6. Time value of money
4.7. Present value of future payments
4.8. Justification of Addopted project
5. Project Planning – Project Charter
6. Work Cascading Structure (WBS)
7. Project Scheduling ( Arrow-on-Arrow and Gantt Chart )
8. Project Scheduling ( CPM and PERT )
9. The Responisbility Matrix
10. Resources and Budget Planning
11. Clasification of Projects