Real-world definitions of financial terms Return on investment has become such a crucial tool for businesses that several techniques have been developed to measure it. ROInow! uses Generally Accepted Accounting Principles and capital budgeting principles to generate the most commonly used financial metrics. ROInow! will generate:
Return On Investment
- Return on Investment (ROI)
- Net Present Value (NPV)
- Payback Period
- Internal Rate of Return (IRR)
ROI is perhaps the most common method to evaluate and compare the attractiveness of one business investment to another. The results of an ROI calculation are expressed in percentage terms and usually are qualified by a time period. In other words, an ROI is usually a certain percentage over a certain number of years. Simply speaking a three-year ROI of 150% means that the benefits you accrue from the project are one and one-half times greater than the cost and resources necessary to implement it.
Net Present Value
The NPV is essentially a profit and loss statement for the project. It is calculated by summing the present value of the net benefits for each year minus the initial costs of the project. A positive NPV means that the project generates more cash than it took to fund. A negative NPV means that the project generates a loss.
Payback is the time it takes for your project to recoup the funds expended. It designates a time when the project becomes breakeven. It is normally expressed in years or months.
Internal Rate of Return
IRR is the discount factor that you would need to apply to the annual benefit for the net present value of the project to equal zero. In other words, it is the percentage rate by which you have to discount the benefits until the point that they equal all the costs.
Other Financial Measures
There are numerous less traditional financial measures that have become popular recently, such as Equity Value Analysis (EVA), but these new age financial measures have yet to obtain a broad level of acceptance.