ROI

ROI or return on investment is a relatively simple concept. It works similarly to that of the stock market. In this case, ROI is a metric in determining how well a particular stock or investment portfolio is performing compared to other portfolios. For example, if I were to invest and buy 1000 shares of Tesla stock at 100 dollars each. At the same time, I have also brought ten shares of Berkshire Hathaway at 1000 dollars a share. In the end, I sold both of them, and I’ve made 115,000 dollars for Tesla and 20,000 dollars for Berkshire Hathaway. You might think that I’ve made a massive profit for Tesla, but it is quite the contrary because I’d hoped I’d invested more in Berkshire Hathaway. After all, if we deduct the initial investment, that Tesla stock would be 115,000 profit minus 100,000 investment equals to 15,000 dollars in profit. If we divide this number with our initial investment, 15,000 divided by 100,000, that return on investment is 15 percent. Whereas for Berkshire Hathaway, that 20000 dollars profit minus the initial 10,000 and using the same ROI formula would have been a 100% return. Therefore, that would mean if I dared to invest 100 shares of Berkshire Hathaway, I would have made a whopping 100,000 dollars on that initial investment. To put it simply, ROI looks at the overall percentage profit over investment and not the total profit dollar amount. The higher the percentage, the better the return.

NPV

NPV or net present value is an excellent metric in analyzing whether or not your newly found business is sustainable. The most critical value in this formula is the value of time over money. To put it simply, it will analyze the appreciation and depreciation of money and asset over time. For example, If I was to establish a storefront inside a mall and I was granted an initial capital of 20 thousand dollars. With those numbers in mind, the first thing that I will need to do is to calculate the profit returns over time, similar to that of a payback analysis. The catch is that I would have to consider potential appreciation, depreciation, maintenance cost, service costs for those maintenances adjusted for the future economic and labor workforce prospects for my assets, and the cost of doing business in the years ahead. Hence, hypothetically speaking, if I have made 8 thousand dollars in the first year and another 14 thousand dollars in the second year, it will not be immediately apparent that I was turning a profit. Because if I were to adjust for inflation and the rise of cost in raw materials, I might have just made 8000 dollars in the first year and 10 thousand dollars in the second year. Therefore, concluding that my business is unsustainable because of that negative 2000 dollars on my ledger.

Payback Analysis

It is always good to keep payback analysis in mind because it will help us make sounding purchase decisions in our lives, most notably, house renovations. However, it is worth noting that this concept is also applicable in all aspects of our daily financial lives. For example, when we make a car purchase, especially when the vehicle and fuel prices are at their all-time highs, buying a reliable and gas-efficient car should be in everyone’s best interest. Hence, this payback analysis comes into play when we make purchasing decisions after factoring in the daily commute, maintenance cost, gallon per mile, and perhaps even resell value over the years of ownership. For instance, if the car is projected to lose 50% of the market value as soon as we leave the dealership, as most new cars are, we might want to look into mint condition used cars. Likewise, suppose the car will start having mechanical problems at 60 thousand miles. You might want to skip being the scapegoat in this situation and not buy this used car regardless of how pristine the car is being maintained. In this case, you might want to either look into the same model of cars but with lower mileage or just simply a different and more reliable model with higher mileage.