Calculating ROI

RoI calculation
Elizabeth
As your figures are forward projections I am assuming that this is in fact investment appraisal (IA) rather than RoI. I’m an advocate of IA but am skeptical about translating predictive benefits to the penny three years ahead. Even predicting costs over that period can only be an estimate.
But, to answer your questions, if the investment delivers a benefit over three years, and that benefit can be confidently predicted, and the costs are also the three year costs, then all that is fine.
A lot can happen over three years – for example, staff turnover may mean you lose some benefits and need to incur further costs to train their replacements. Proceedures can change, work performance can go up or down due to other factors, and the value of the benefits can change depending on how critical they are to the business and how you calculated them.
In most businesses it would be sufficient to make the case that the initial outlay is £100k and the likely payback is around two years. Benefits are likely to be ongoing, so that investment will keep adding value for at least three years to be worth about 50% more than the initial outlay.
If this is an academic exercise (it looks like it might be, and if so it is poorly conceived), payback on option b, in theory, is 0.9 of a year or 47 weeks if the costs and benefits are evenly distributed throughout the year.
What a brain frazzlinly pointless exercise!
Graham

2 Responses

Claire Savage says:

January 15, 2009 at 7:53 pm

This may help
Hi Elizabeth
Paul Kearns wrote a great Bitesize Guide to ROI for TrainingZone, which may just help.
Here’s the link:
https://www.trainingzone.co.uk/item/123814
Good luck!
Claire Savage
Editor, news
User deleted says:

January 16, 2009 at 9:07 am

RoI calculation
Elizabeth
As your figures are forward projections I am assuming that this is in fact investment appraisal (IA) rather than RoI. I’m an advocate of IA but am skeptical about translating predictive benefits to the penny three years ahead. Even predicting costs over that period can only be an estimate.
But, to answer your questions, if the investment delivers a benefit over three years, and that benefit can be confidently predicted, and the costs are also the three year costs, then all that is fine.
A lot can happen over three years – for example, staff turnover may mean you lose some benefits and need to incur further costs to train their replacements. Proceedures can change, work performance can go up or down due to other factors, and the value of the benefits can change depending on how critical they are to the business and how you calculated them.
In most businesses it would be sufficient to make the case that the initial outlay is £100k and the likely payback is around two years. Benefits are likely to be ongoing, so that investment will keep adding value for at least three years to be worth about 50% more than the initial outlay.
If this is an academic exercise (it looks like it might be, and if so it is poorly conceived), payback on option b, in theory, is 0.9 of a year or 47 weeks if the costs and benefits are evenly distributed throughout the year.
What a brain frazzlinly pointless exercise!
Graham