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Project Management, Project Planning, Templates and Advice

Essential Microsoft Project: The 20% You Need to Know
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  • Step-by-step instructions for creating a project plan in under a day
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ROI - Return on Investment - meaning and definition

by | reviewed 19/04/2023
ROI is an acronym for Return on Investment. ROI is simply a measurement of an expected benefit resulting from an investment. stakeholdermap.com

Why is ROI important?

ROI is an important metric because it helps businesses and investors evaluate the potential profitability of an investment. It allows them to compare different investments and choose the most profitable option.

How is ROI calculated?

ROI is calculated by dividing the net profit of an investment by its cost and expressing the result as a percentage. The formula for calculating ROI is:

ROI = (Net Profit / Cost of Investment) x 100%

Who uses ROI?

ROI is used by businesses, investors, and financial analysts to evaluate the potential profitability of an investment. When is ROI used?

ROI is used when making investment decisions or when evaluating the success of an investment that has already been made. It can also be used to compare the performance of different investments over time.

An example of an expected Return on Investment (ROI)

This is an example of an expected ROI for a fictional construction project for 10 luxury apartments. The construction company - Acme - outlay £6 million. The building resale value expected is at least £6m

  • Expect rent and service charges per flat per month (provided apartments are let quickly): £4000
  • Gross annual income: £480,000
  • Gross annual return on investment: 8%

example return on investment (ROI) graph
By SK (FED Architected Agile Template) [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons.

How to does ROI relate to stakeholders?

Stakeholders can have a significant positive or negative impact on a company's ability to achieve a return on their investment be that for anything from an oil rig, new product line, property or software etc.

Stakeholder actions can prevent planned projects from getting started resulting in loss of investment, and can reduce income from existing assets. See stakeholder news for some examples of stakeholder actions that have had negative consequences for the company targeted by the action. Conversely successful stakeholder engagements can smooth the path to achieving planned ROI, with Stakeholders becoming advocates for a company, happily sharing their knowledge and expertise company management.

How does ROI relate to Projects and Project Management?

When a firm undertakes a project they make an investment. In other words they commit to take on costs for example: man hours, use of space, use of equipment, and purchasing new supplies, software, materials, property etc. They expect to get a return on that investment for example increased revenue or reduction in costs.

Project feasibility studies will often be undertaken to establish the likelihood of success and a achievement of ROI, and Project Management methodologies focus on defining the expected ROI early in the project life cycle usually through a Business Case. The likelihood of achieving the ROI is then monitored and measured throughout the project life cycle.

Further reading