How is Return on Investment calculated?

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Return on Investment, or ROI, is simply the amount of money you profit from the investment, divided by the amount you had to invest in order to get that profit.

Since the profit is equal to the amount gained minus the amount spent, ROI can be calculated using this formula:

ROI = (Gain - Cost)/(Cost)

For example, if you spent $120,000 buying an asset that you later sold for $140,000, this would be your ROI:

ROI = ($140k - $120k)/($120k) = 20/120 = 16.7%

ROI does not take into account the time that the investment takes to mature, but this is often very important for real-world investments. Earning 7% in only 1 year may be better than earning 15% in 3 years, since the 1-year investment could be spent or reinvested in the meantime.

A better assessment of the true value of an investment is generally found using Net Present Value (NPV) or Real Rate of Return (RRR).

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