5 Return On Investment Calculation Tips

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Return on investment calculation is critical to using ROI for prioritizing requirements. We’ve discussed how to forecast return on investment by estimating costs and predicting benefits. Here are five tips to help you when calculating return on investment.

The following ROI calculation tips are detailed in this article:

1. Recognize the Risks
2. Discount Future Cash Flows
3. Separate Sales From Expenses
4. Overcome Ozymandias Syndrome
5. Ignore Infinite Elvises

Read on for the details…

Prioritization With ROI and Utility

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Prioritization with ROI is generally thought of as a quantitative analysis. For hard ROI, that is true. For soft ROI, it is anything but true. You have to make a prediction of the utility of the requirement or feature. That predicted utility is based on our expected utility, which is based on your past experiences. Your past experiences are reflected in remembered utility, which is a function of experienced utility. How can you know with certainty, and use that to prioritize requirements or features?

Definition of payback period

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We’ve talked previously about using ROI to determine which projects to fund. This isn’t the only way to make those decisions, as Ski points out with the concept of flush. Payback period is the measure of how quickly an investment returns the invested amount, or the break-even point in the investment.

Definition of NPV – Net Present Value

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Net present value, or NPV is the great equalizer of financial analysis.

NPV allows us to compare any two investments and determine which is the better investment.

NPV tells us how many dollars, today, we would be willing to spend to receive money in the future. NPV lets us compare investments that pay back money in very different ways – we can decide if we would rather have $10,000 in one year, or $500 per month for 20 months. Without NPV, the two investments appear to be the same (they both return $10,000), but one of them is better than the other.

Definition of ROI – Return on Investment

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We talk about ROI all the time – what is it, in layman’s terms? ROI is the acronym for return on investment. Another way to think of it is “How much profit will we make if we invest in this project?” Profit is revenue minus costs. Technically, the question should […]