ROI, short for Return on Investment, serves as a crucial metric in the realm of finance. It acts as a yardstick to gauge the effectiveness of an investment or to compare the performance of different investments. This metric is typically expressed as a percentage or a ratio, providing a clear understanding of the investment's profitability.
The formula for calculating it is as follows:
ROI = (present value of the investment - cost of the investment) / cost of the investment
In the above formula, the "present value of the investment" refers to the proceeds received from the sale of the interest investment. By expressing the return as a percentage, it becomes easier to evaluate and rank various investment options side by side. This method empowers individuals to assess the profitability of their investments, helping them make prudent financial choices based on concrete data.
