Calculation of ROI (Return of Investment)

Written by Amey Dabholkar

September 9, 2015

ROI means return on Investment. Return on investment is an important indicator which is used to measure the efficiency in business. Its calculation is similar to that of calculation of interest on Fixed Deposit. For Example, if I want to invest $10000 in Fixed deposit for a period of a year @9% simple interest then I would get $900 as Interest. That amount which is received as interest is Return on investment of $10000. An entrepreneur is not interested in how much profit earned but he is interested in how much ROI he has received on investing the certain sum in the business.

Return on investment is calculated as follows
ROI = Profits Received / Total Investment Made.
The total Investment made is the capital introduced by the businessman while starting up the business
Businessman while thinking of investment has 2 options
1. Either to Invest amount of money into business
2. Invest in Bonds, Fixed Deposit
The difference is only one we get security in Case 2 whereas we don’t get guarantee of the same rate of return in case 1. Hence when ROI is more in case 2 than in case 1 then anyone would not invest in Case 1 but in Case 2 and vice versa. Hence ROI is a deciding factor.

You could see in the image down below regarding how the ROI is calculated in Excel. Calculation of ROI is very easy but the interpretation of the term is important for understanding purposes

Want to reach to the desired ROI and want to estimate how much profit is required for the same ? Use Goal Seek to complete the problem. Goal Seek enables to reach the desired goal by changing the formula cell to the desired value by implementing the change in one of the nonformula cell. More details regarding goal seek will be discussed in a separate blog post.

I have set a formula cell to Value .60 This is because Excel refers 100% as 1 Hence 60% is 0.60
It will take some time to calculate as I press the Ok button. It took around 6 Sec to calculate and then it would change the value to 60% by changing profit to $150000. More Examples of Goal Seek will be discussed in separate blog Post.

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Warm Regards

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