1. What is Return on Investment (ROI)?

Return on Investment (ROI) is a financial metric used to evaluate the efficiency and profitability of an investment. It compares the net income generated by an investment to its initial cost, expressed as a percentage.

2. How Does the Calculator Work?

The calculator uses the ROI formula:

Where:

• \( NI \) — Net Income ($)
• \( IC \) — Initial Cost ($)

Explanation: The formula calculates the percentage return on an investment by dividing the net income by the initial cost and multiplying by 100.

3. Importance of ROI Calculation

Details: ROI is a crucial metric for investors and business owners to assess the profitability of investments, compare different investment opportunities, and make informed financial decisions.

4. Using the Calculator

Tips: Enter net income and initial cost in dollars. Both values must be valid (net income ≥ 0, initial cost > 0).

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good ROI?
A: A good ROI varies by industry and investment type, but generally, a higher ROI indicates a more profitable investment. Most investors look for ROIs that exceed their required rate of return.

Q2: Can ROI be negative?
A: Yes, ROI can be negative if the net income is negative, indicating that the investment resulted in a loss rather than a profit.

Q3: What are the limitations of ROI?
A: ROI doesn't account for the time value of money, investment duration, or risk factors. It should be used alongside other financial metrics for comprehensive analysis.

Q4: How is ROI different from ROE?
A: ROI measures return on total investment, while ROE (Return on Equity) measures return specifically on shareholders' equity.

Q5: Should ROI be annualized?
A: For comparing investments of different durations, annualized ROI provides a more accurate comparison by accounting for the time factor.