INTRODUCTION
Return on investment (ROI) is a way to figure out how much money you make compared to how much you spend on an investment. ROI is very necessary because it helps you see how well your investments are doing, and understand how profitable your investments are. It is an approximate measure of an investment’s profitability.
Why is Calculating Return on Investment Important?
Calculating ROI helps you easily understand and compare how well different investments are doing. The following are five reasons why it is necessary to calculate return on investment:
1. Checking Performance: This entails checking whether the money you put into an investment or a business is making enough profit. It is like seeing if the chickens you raised are laying enough eggs for the feed and care you give them. This will help you understand if your investment is worthwhile and if you should continue with it or make changes.
2. Comparing Options: By calculating ROI, you can compare different investment choices to see which one is more profitable. If you have different businesses you could start watching out which one will make you more money. It helps you pick the best option for your money.
3. Making Smart Choices: Knowing the ROI helps you decide whether to keep your investment, sell it, or put more money into it. This is like deciding what to do with your current business, whether to stop or invest more into it.
4. Planning Ahead: ROI assists you in creating a budget and organising your future investment objectives. This is drawing a financial roadmap for the future based on the performance of your current investments. As a result, you will be able to make wise choices on where to invest your money moving forward and how to gradually increase your wealth.
5. Using Money Wisely: Calculating ROI ensures your money is working in the best way possible. It is making sure every money you spend on your business brings in profit, so you are not wasting money. This helps you make efficient and effective use of your financial resources, optimizing your business’s profitability.
How to Calculate Return on Investment
Return On Investment (ROI) is calculated by dividing the profit by the amount originally invested.
You find this number by subtracting what you first spent on the investment from its final value. Then, divide this result by the initial cost of the investment. Finally, multiply that number by 100 to get the percentage return on investment (ROI).
The formula for Calculating Return on Investment
There are many formulas used to calculate ROI, but the most common are:
ROI = Net Income / Cost of Investment
and
ROI = Investment Gain / Investment Base
Example
Let’s say you invest ₦5,000 in a share of Luxe Residence on the Landpay app, and after one year, your investment is supposed to have grown by 9%.
1. Initial Investment: ₦5,000
2. Growth Percentage: 9%
To calculate ROI using the formula (ROI = Net Income / Cost of Investment)
1. Calculate Net Income:
– 9% of ₦5,000 (0.09×5000=450)
– Your net income is ₦450.
2. Apply the Formula:
ROI = Net Income / Cost of Investment
– ROI = 450 / 5,000
So, the ROI for your investment in a share in Luxe Residence is 9%. This means for every ₦5,000 you invested, you earned an additional ₦450 over the year.
CONCLUSION
ROI calculations are easy to do and can be used to determine whether to accept or reject an investment opportunity. A positive or negative return on investment (ROI) can provide valuable insight into the investment’s worth for the investor. An investor can distinguish between underperforming and performing investments by using an ROI calculation.
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