RETURN ON INVESTMENT

An Undergraduate Written Report Submitted to the Faculty of the

Institute of Engineering and Applied Technology,
Bulacan Agricultural State College,
San Ildefonso, Bulacan

In partial fulfillment of the requirements for

ENSC 108 – Engineering Economy Bachelor of
Science in Geodetic Engineering

BALMORES, ALDREI RAFAEL

BASA, DAVE
LEDESMA, LOVELY ROSE
MACASU, CARL DAVEN
NOPRADA, OSHMAN FHILIP
PERALTA, JOEL
PORAL, MARIAH ANSHERINA
PORCINCULA, MERY NIEL
TOLENTINO, JOHN WILLIAM

ENGR. SHIELA MARIE F. GATCHALIAN

Instructor III

July 22, 2024

 RETURN ON INVESTMENT

Learning Outcomes

 Know the principles and usage of Return of Investment

 Discuss the different types of ROI and Computation

Outline

 What are investment and its uses?

 What is ROI?
 Types of ROI
 Advantage and Disadvantage of ROI
 Computation

WHAT IS INVESTMENT?

An investment is an asset or item acquired to generate income or gain

appreciation. Appreciation is the increase in the value of an asset over time. It requires
the outlay of a resource today, like time, effort, and money for a greater payoff in the
future, generating a profit.

USES OF INVESTMENT
- An investment involves using capital in the present to increase an asset's value
over time.
- Investment may include bonds, stocks, real estate, or alternative investments.
- Investments can be diversified to reduce risk, though this may reduce the amount
of earning potential.

INVESTMENTS AND RISK

Investment return and risk commonly have a positive correlation. If an investment

carries high risk, it should be accompanied by higher returns. When making investment
decisions, investors must gauge their risk appetite. Some may be willing to risk the loss
of principle in exchange for the chance at greater profits.

What is Return on Investment or ROI?

Return on Investment (ROI) is a financial metric used to measure the profitability

of an investment relative to its cost. It is calculated by dividing the net profit generated
from the investment by its initial cost and is expressed as a percentage. An annual ROI of
approximately 7% or higher is generally considered favorable for investments in stocks,
though what constitutes a "good" ROI can vary based on factors like risk and market
conditions. When you put money into an investment or a business endeavor, ROI helps
you understand how much profit or loss your investment has earned. Return on
investment is a simple ratio that divides the net profit (or loss) from an investment by its
cost. Because it is expressed as a percentage, you can compare the effectiveness or
profitability of different investment choices.

Types of ROI

 Financial ROI- Focuses on monetary returns.

 Social ROI (SROI) - Measures the social impact of investments.
 Marketing ROI- Evaluates the return on marketing expenditures.

Advantages of ROI

 Simplicity- Easy to understand and calculate.

 Helps in decision-making- ROI helps investors and managers to make informed
decisions about which investments to pursue and which to avoid
 Widely used- ROI is a widely used metric in finance, and investment and is
accepted as a standard way to evaluate the performance of an investment.
 Versatility- Can be applied to various types of investments.
 Comparative- Useful for comparing the profitability of multiple investments.

Disadvantages of Return on Investment

 Does not consider the time value of money- ROI does not take into account the
time value of money, meaning it does not consider the fact that money received in
the future is worth less than money received today.
 Can be affected by accounting policies- ROI can be affected by the accounting
policies of a company, such as how they treat depreciation or amortization, which
can make it difficult to compare the performance of different companies.
 Does not consider risk- ROI does not take into account the risk involved in an
investment, meaning it does not consider the potential for loss.
 Limited to historical data- ROI is limited to historical data, which means it
cannot predict future performance.

NET PROFIT

It refers to the amount of money left after all the expenses have been subtracted
from revenues.
COST OF INVESTMENT

The Cost of Investment is the combined Cost of Investment for all the funds that
make up the portfolio. (Can be also determined as first investment)

PRESENT VALUE

Present value (PV) is the current value of a future sum of money (to make it easy
it’s the value of money after “n” years)

How to Calculate ROI

The basic formula for ROI is:

ROI = (Net Profit / Cost of Investment) x 100

ROI = (Present Value – Cost of Investment / Cost of Investment) x 100

Example 1:

Let’s say you invested P 25,000 in the company XYZ last year and sold your
shares for P 25,500 this week. How would you calculate your ROI for this investment?

GIVEN:

Present Value = P 25,500

Cost Investment = P 25,000

SOLUTION:

ROI = (P 25,500 – P 25,000) / P 25,000 x 100

ROI=2%

Example 2:

Sir. Q invested P 57,000 pesos for BAS Company last year and sold his share
having a net profit of P 4,475 for a month. How would you calculate Sir Q’s ROI for this
investment?

GIVEN:

Net profit = P 4,475

Cost Investment = P 57,000

SOLUTION:

ROI = (P 4,475) / P 57,000 x 100

ROI=7.85%

WHAT IS ANNUALIZED ROI

An annualized rate of return is calculated as the equivalent annual return an

investor receives over a given period. The Global Investment Performance Standards
dictate that returns of portfolios or composites for periods of less than one year may not
be annualized. This prevents "projected" performance in the remainder of the year from
occurring.

HOW TO CALCULATE ANNUALIZED ROI

Annualized ROI = {[1 + (Net Profit / Cost of Investment)] (1/n) – 1} x 100

Example 1:

If you bought a portfolio of securities worth P 25,000 and five years later your portfolio
was worth P 41,000, how much did the annualized ROI increase over those 5 years?

GIVEN:

Net Profit= P 16,000

Cost of Investment= P 25,000

n= 5 years

SOLUTION:

Annualized ROI = [1 + (16,000 / 25,000) (1/5) – 1] x 100

= 12.8%

WHAT IS MARKETING ROI

Marketing ROI is the practice of attributing profit and revenue growth to the
impact of marketing initiatives. By calculating return on marketing investment,
organizations can measure the degree to which marketing efforts either holistically, or on
a campaign-basis, contribute to revenue growth. Typically, marketing ROI is used to
justify marketing spend and budget allocation for ongoing and future.

There are three sorts of money you may earn on your investments when it comes
to ROI. The following are some of them:

 Interest- Interest is one method to earn money from your assets. Savings accounts
and bonds are two types of assets that offer interest to your business.
 Capital gains- If you sell an investment for more than you bought it, your firm
will make a profit.
 Dividends- Finally, you could be paid in dividends. In this example, you'd get a
portion of a company's profits regularly.

HOW TO CALCULATE A COMPANY’S MARKETING ROI?

We understand the concept of Return on Investment, but we are yet to know how
to calculate the ROI of any company.

In simpler terms, it can be calculated using this formula:

ROI = (Return - Investment) / Investment

This formula is applicable for new and has not yet invested in various marketing
areas. However, for businesses, it is frequently too simple, since it is difficult to
understand what qualifies as an investment and what does not. For example, if a business
has a marketing staff, it must decide whether or not the salary of the marketing
employees is deemed an investment.

In that case, the marketers use this formula:

ROI = (Sales Growth - Organic sales - Cost for marketing] / Cost for marketing)

Here is the meaning of the given terms in the formula:

Sales Growth- The sales growth rate measures the rate at which a business is able to
increase revenue from sales during a fixed period of time.

Organic Cost- Organic sales are revenues generated from within a company. Organic
sales encompass those streams of revenues that are a direct result of the firm's existing
operations as opposed to revenues that have been acquired through the purchase of
another company or business unit in the past year.
 Marketing cost- Your marketing cost is the overall amount you spend on your marketing
campaign. This figure comprises ad expenditure, software, and compensation for
employees working on your marketing campaign.

Example 1:

Let's say a company has a 4% organic sales growth rate and runs a P 100,000
campaign for a month. That month's sales increase was P 135,000. According to
historical monthly averages, 4 percent (P 5,400) of that is organic. Use the ROI
marketing formula.

GIVEN:

Sales Growth= P 135,000

Organic Growth= P 800

Marketing Cost= P 100,000

SOLUTION:

(135,000 - 5,400 - 100,000) / 100,000 *100

= 29.6%

WHAT ARE THE CHALLENGES OF MARKETING ROI?

The equations required to calculate marketing ROI may seem straightforward at

first, but they may soon become complicated and layered. Take into account the
following:

1. Marketing Metrics are Far Too Simple

There are several things to consider when determining genuine marketing

ROI. The most important thing for marketers to measure against is a clear and
consistent sales baseline. External elements that influence campaign performance,
such as weather, seasonal patterns, events, and so on, should be included in ROI
calculations.

2. Marketers are mostly concerned with short-term results

 To measure the effectiveness of their efforts, many marketers concentrate
on particular, immediate data. We look at click-through rates, impressions, social
shares, and other metrics much too frequently. Long-term objectives like brand
recognition, customer connections, and customer retention, on the other hand,
might take months or years before marketers see the full benefit. With this in
mind, it's critical to match success measures to a campaign's overall purpose and
timeframe.

3. The Omnichannel Marketing Environment

Today's Omnichannel marketing campaigns span several touch points

across online and physical platforms, rather than being confined to a single
channel. Only providing marketers with pieces of the total marketing effect jigsaw
by focusing marketing ROI evaluations on individual channels. Unified marketing
metrics that can align different data into integrated, granular insights are now
required for proper marketing ROI evaluation.

4. Several Touch Points Prior to Purchase

A customer must go through 6-10 touch points on average before making

a purchasing decision. Marketers must understand the effect of online and offline
touch points throughout the marketing mix in order to accurately assess marketing
ROI at the granular level. When calculating marketing returns, the link between
these touch points in the sales funnel must also be taken into consideration.

5. Attribution Models That Aren't Up to Date

Using outmoded attribution models to quantify and attribute the effect of

touch points and channels may lead to misattribution, which can distort ROI
calculations. Aggregate metrics, such as media mix models, will not deliver the
detailed information that marketers want. Granular metrics, such as multi-touch
attribution models, on the other hand, will not reveal the influence of offline
channels and external variables on marketing ROI.

STRATEGIES TO IMPROVE THE ROI:

Reduce Costs
The process of decreasing a company’s expenses to maximize profits. It involves
identifying and removing expenditures that do not provide added value to customers
while also optimizing processes to improve efficiency. Cost reduction typically focuses
on generating short-term savings.

Increasing Revenues
Revenue is the amount of money that a business brings in, including income from
sales and any additional income from bank interest or investments

Manage Risks
The continuing process to identify, analyze, evaluate, and treat loss exposures and
monitor risk control and financial resources to mitigate the adverse effects of loss.

SOCIAL RIO

Social return on investment (SROI) is a method for measuring values that are not
traditionally reflected in financial statements including social, economic, and
environmental factors. They can identify how effectively a company uses its capital and
other resources to create value for the community.The purpose of issuing SROI is for
corporations to be able to look at their social impact in financial terms.

Social Return on Investment Formula

SROI = (SIV – IIA) / (IIA x 100%)

SIV= Social Impact Value

IIV= Initial Investment amount

Example 1:

During year one, the nonprofit invests P 100,000 to connect with, train, and
educate ex-felons. Twenty ex-felons manage to secure jobs at an average salary of P
32,000 per year. In theory, this would mean the nonprofit generated P 640,000 (20 x P
32,000) in income. However, six left the program early, and three secured a job via
alternative channels. Using SROI principles, only 11 ex-felons completed the program
and secured jobs with the help of the nonprofit. At an extremely basic level, nine must be
discounted from the calculations as deadweight, whereas 11 can be directly attributed to
the actions of the nonprofit. So, based on the nonprofit’s stated outcomes, they generated
P 352,000 (11 x P 32,000) through their job-readiness program.
GIVEN:

SIV=(11 non-profit)(P 32,000 average salary)=P 352,000

IIV= (P 100,000 initial investment)

SOLUTION:

($352,000 - $100,000) / ($100,000 x 100%) = 2.52

This means that for every $1 spent, the nonprofit created a social impact of $2.52 for the
first year.

Key terms

Asset- is a resource that is expected to provide a future benefit to its owner.

Income- is the money you receive in exchange for your labor or products. Income may
have different definitions depending on the context

Profit- describes the financial benefit realized when revenue generated from a business
activity exceeds the expenses, costs, and taxes involved in sustaining the activity in
question.

Revenue- often referred to as sales or the top line, is the money received from normal
business operations.

Bonds - A bond is a fixed-income instrument and investment product where individuals

lend money to a government or company at a certain interest rate for an amount of time.

Equity - Equity, referred to as shareholders' equity (or owners' equity for privately held
companies)

Stocks - A stock, also known as equity, is a security that represents the ownership of a
fraction of the issuing corporation.

Real Estate - Real estate is defined as the land and any permanent structures, like a home,
or improvements attached to the land, whether natural or man-made.

Limitations of ROI

 Short-term Focus- Does not account for the time value of money.
 Risk Ignorance- Does not consider the risk associated with investments.
  Inconsistencies- Different methods of calculating ROI can lead to varied results.

ROI in Different Sectors

 Business- Used to measure the efficiency of capital expenditures, marketing

campaigns, and projects.
 Education- Evaluates the returns of investing in educational programs or
technologies.
 Healthcare- Assesses the benefits of new treatments or healthcare initiatives.

Enhancing ROI

 Cost Management- Reducing investment costs can improve ROI.

 Revenue Growth- Increasing the returns from investments.
 Strategic Planning- Making informed investment decisions based on thorough
analysis.

Practical Applications

 Investment Projects- Businesses assess the ROI of new projects to ensure

profitability.
 Personal Finance- Individuals use ROI to evaluate the effectiveness of their
investments.
 Non-profits- Organizations measure the impact of their social programs through
SROI.
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