ROIanalyses

ROI analyses are a set of methods used to assess the profitability of an investment by comparing expected benefits to costs. They are commonly employed in business planning, project evaluation, and procurement decisions.

The basic ROI is calculated as ROI = (Net Benefits / Costs) × 100, where net benefits equal total monetized benefits minus total monetized costs over a defined period. Benefits may include revenue gains, cost savings, and avoided expenses; some analyses also attempt to monetize intangible advantages.

ROI is simple and intuitive but has limitations. It does not reflect the time value of money or risk unless time-adjusted or supplemented by other metrics such as net present value (NPV) or internal rate of return (IRR). There are static and discounted forms.

A typical ROI analysis proceeds by defining scope, identifying and quantifying costs and benefits, selecting a time horizon, discounting cash flows if needed, computing ROI, and performing sensitivity analyses to test key assumptions and compare alternatives.

Applications include IT projects, product launches, efficiency improvements, marketing campaigns, and capital investments. It is often used in business cases to prioritize initiatives but should be complemented by qualitative assessment and risk considerations.

Limitations include reliance on forecasted data, challenges in monetizing intangible benefits, ignoring distributional effects, and potential bias in input assumptions. Transparent documentation of methods and scenarios helps interpretation.