Calculating return on investment (ROI) is a crucial skill for entrepreneurs and investors. The post emphasises the importance of understanding the difference between gross and net returns. Gross returns do not account for inflation, taxes, and other costs. Net returns, on the other hand, consider these factors, providing a more accurate picture of the real return on an investment.
The post provides a simple formula to calculate ROI: (Gain from Investment – Cost of Investment) / Cost of Investment. However, it stresses that this formula only gives the gross return. For a more nuanced understanding, one must also consider the time value of money, which reflects the idea that money available today is worth more than the same amount in the future due to its potential earning capacity.
Moreover, the post discusses the importance of understanding the concept of ‘cash on cash’ return. This is the annual return the investor makes on the investment, excluding the appreciation of the investment. It’s a vital measure for investments like real estate, where appreciation can significantly impact the return.
Finally, it advises that ROI calculations should be an ongoing process, not a one-time calculation. This allows investors to track their investment’s performance over time and make informed decisions.
Go to source article: http://avc.com/2014/09/reblog-how-to-calculate-a-return-on-investment/