## What is Return on Investment (ROI)?

ROI stands for Return on Investment and is a financial metric used to measure the profit or loss that any investment might deliver in the future. It can be calculated for various investment options and the most standardized measure to judge an investment option or compare two different investment options.

## Formula for Calculating ROI

Net Return on Investment is the amount of gain or loss that any investment might make in the coming years.

Cost of Investment is the amount of money that is invested.

Let us understand through a real-world example how you can calculate the return on investment for any investment.

So let us suppose that you run a taxi business. Now you are planning to buy a new vehicle. Let us assume that the car is costing you 5,00,000 INR. Let us suppose the maintenance cost for the car is 10,000 INR every year. Let us also assume that you can sell the car for 50,000 INR after ten years. In this case, if you calculate the total cost of the vehicle for ten years would be 5,00,000 + 1,00,000 (maintenance) - 50,000, which is 5,50,000 INR.

Now let us suppose that after our costs are covered, we can earn 25,000 INR per month from the taxi. This means that in 12 months our profits would be 3,00,000 INR. This means that the gain over the life of the vehicle would be 30,00,000 INR.

Now, let us calculate the return on investment on this deal.

Net Return on Investment = 30,00,000 - 5,50,000 = 24,50,000

Cost of Investment = 5,50,000

Therefore, Return on Investment = 2450000 / 550000 * 100

= 445%

It is essential to notice that this return on investment is for ten years.

The annual returns would be different from this number. It is essential to understand how the return is calculated and what insights you can get from it.