roi

Return on Investment

Principles

• A return is always expected on any investment
• Guiding Principles
  • The higher the risk, the higher the expected return
  • Time value of money… Inflation
• Building blocks
  • Future value: of current investments
  • Present Value: of the future returns from investments
  • Rate of Return: required rate of return (Hurdle Rate) on investoments

Important

Engineers need to know ROI. This amplifies the contribution of every team member, and helps the project get funded.

(G - C) / C = ROI

• G = financial gains
• C = up-front and ongoing costs of investments in the project

Evaluating Investments

1. Estimate Cash Expenditures and Timing for investments
2. Estimate Future Cash In-Flows and Timing
3. Evaluate Net Cash Flows
   • Simple Payback calculation
   • NPV - Net Present Value
   • Internal Rate of Return (IRR)

Method	Pros	Cons
Simple Payback	Easy to calculate and understand	Does not consider time-value of money; Does not compare to hurdle rate.
NPV	Quantifies cash result, considers time-value of money and hurdle rate.	More complicated
IRR	Easier to understand and compares to hurdle rate; Considers time value of money	Does not provide total net cash; Biased towards shorter duration proposals.