How to Calculate a Capital Investment Return (ROI)

English: DOE EA Capital Planning and Investmen...

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You have a plan to strategically invest your business capital. You want growth in sales and value for your company and you have identified one or more opportunities to deploy your company’s cash and accomplish your business objectives. How can you identify the most financially attractive investment?

The easiest and most common method to evaluate a business investment is by calculating a static pro forma return on investment (ROI). The word pro forma comes from the sixteenth century Latin word meaning as a matter of form. The pro forma return calculation looks at what will be when the investment is fully operational or stabilized. This calculation ignores the planned ramp up period for the strategic investment but takes into account any operating capacity slack at stabilization.

Time value of money is not a consideration in the pro forma ROI calculation. In other words, if it takes several years after you make the investment to begin generating profit there is no discount for the delay in investment return. Time value of money is a financial principle that a dollar today is worth more than a dollar tomorrow due to expected or realized inflation. To calculate a static ROI simply take the expected stabilized net operating income divided by the expected costs to acquire and improve the investment. You can evaluate competing capital investment opportunities using ROI because all the calculations are made using dollars at today’s value.

Make the right investment choice and your business will bloom with new revenue and added value. Make the wrong choice and you will spend years untangling from an unwise investment and incurring substantial financial losses.

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About Michael Shelton

Your Business Coach Facilitating Delegation and Work Group Engagement Michael Shelton has over twenty-five years of business and military accomplishments, including extensive experience with one of the largest, publicly traded real estate investment trusts (REIT). He is a qualified business coach with assignments in cross-functional work group management, strategic planning, unit leadership, joint venture acquisitions, executive education, mentoring, training and merger integration. Michael has accumulated best practices for building committed work groups from more than $4 billion of capital markets transactions and commercial property development. He served as a commissioned officer and helicopter pilot in the U.S. Army, and earned his MBA from The University of Arizona. Michael has served as a major conference panelist and is the author of Cash Flow Rich, Winning Ways to Evaluate and Finance Real Estate. Today, he helps business owners get more work group engagement as President and CEO of Shelton Business Services, LLC in Scottsdale, Arizona. Disclaimer: I don't offer investment, legal or tax advice. Talk to your broker, accountant or lawyer for investment, tax and legal help. I might own stock in the companies I mention on-line. My posts, tweets and other on-line activity are my personal thoughts and don't represent my employer or company.
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3 Responses to How to Calculate a Capital Investment Return (ROI)

  1. Pingback: How to Calculate the Net Present Value (NPV) of a Capital Investment | Borrowing Money: Your Handy Guide

  2. I must start referring to you as Professor Shelton! Great database of foundational knowledge you have established here, and the simple message in this post is lost on many of our financial geniuses! Keep it up, Professor. – MH

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