Example with formular Return on Investment (ROI), Payback Period and Cost Benefit Ratio

19. Return on Investment (ROI)

Formula: ROI = (Net Profit / Cost of Investment) x 100 

Return on Investment is the measurement of the rate at which the amount invested in a project gets recovered. This is expressed as a percentage. If net profit is $2000 and the Cost of Investment is $,30,000 then we would calculate ROI as  

(Net Profit / Cost of Investment) x 100 

(2000/30000) x 100 = 6.67 

For this project you have a ROI of 6.67% 

20. Payback Period

Formula: Payback Period = Initial Investment / Periodic Cashflow 

The Payback Period refers to the amount of time it would take to recover the investment in a project. This is again a simple calculation where if the Initial investment is $20,000 and the periodic cash flow per month is $1000, then you could calculate the Payback period as follows:  

Initial Investment / Periodic Cashflow 

20000/1000 = 20 

Payback period in this case would be 20 months 

21. Cost Benefit Ratio

Formula: Cost Benefit Ratio = Net Present Value of Investment / Initial Investment Cost 

Cost-benefit ratio is a comparison between the funds invested in the project and the value that has come out of it. This is a measure of project success in financial terms. If the initial investment was $20,000 and the Net Present Value is $25,000 then the Cost Benefit Ratio could be calculated as follows. 

Net Present Value of Investment / Initial Investment Cost 

25000/20000 = 1.25 

The Cost benefit ratio of 1.25 denotes that every dollar invested in the project is now worth 1.25 dollars.

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