Introduction

The success of an investment project requires achieving its objectives. The objectives of an

investment are multiple, these include: increasing profit, customer satisfaction, increasing the

share market among others. An important role in assessing management performance is the

profits earned on the asset used. By comparing profit with assets we can appreciate the extent to

which profits generate an adequate return on invested capital. Among the most commonly used

indicators in measuring the return on invested capital is Return On Investment (ROI).

According to Andolsen (2004), Return on investment (ROI) refers to a performance metric that

is used in evaluation of an investment's profitability or in comparison of the profitability of many

different investments. ROI is a concept of performance in any form of investment. For

shareholders, the ultimate goal of the company is expressed in ROI. ROI shows the extent to

which the amount invested in a particular action returns as profit or loss. Thus, it enables

efficiency assessment of an amount invested or, in other words, ROI allows measuring the result

in relation to the means used to obtain it.

ROI is calculated as the ratio between operating profit obtained after the action of investment

and the total amount invested (or the total investment costs) and the value obtained is multiplied

by 100. The calculation formula is follows:

ROI= (net profit /cost of project) x 100.

The formula can be applied to all types of investments. ROI is used by investors to select an

investment project of several possible. As well it can be used after completion of the investment,
to measure its profitability.  ROI is an indicator frequently used in performance analysis and

decision making.

Analysis of ROI enables the firms' managers to determine how worthwhile different investments

are in relation to the core goals and financial constraints of the firm. The goal of this research

paper is to apply ROI in a personal project that I took and to show the calculations of ROI which

was used to determine the success or failure of the venture. Finally, a conclusion will wrap up

the whole essay.

Personal projects and calculations

The value of ROI can be positive or negative.  A negative ROI indicates an unprofitable project.

When two investment projects have positive but different ROI, at equal risk, the project with

higher ROI will be privileged. If two investment projects have positive and about the same value

ROI, the project with lower risk will be privileged. When the ROI is bigger, the investment

situation is better. The aim of the company’s manager is to ensure maximizing this indicator for

a long period, thus increasing the enterprise and shareholder remuneration. As an entrepreneur, I

had 2 personal projects and I had to pick one venture. To achieve this, ROI calculations were

done. The following are the projects and the calculations.

Project 1.

My first project involved selling football jerseys. I intended to purchased 227 football jerseys

from the manufacturer at k200 per jersey. I would sale each jersey at k250 and I would incur

transportation costs totaling k3000. To check for profitability of this venture, I first computed the

total expenses and total expected revenues.

Expected revenues = 227 x k250

Expected revenues = k56,750 

Total Costs = (227 x k200) + k3,000

Total Costs = k48,400

To obtain net profit, I subtracted total costs from the expected revenue.

Net Profit = Total Revenue – Total Costs

Net profit = k56,750 – k48,400

Net profit = k8,350

Therefore,

ROI= (net profit /cost of project) x 100.

ROI = (k8,350/k48,400) x 100

ROI = 17.25%

The calculation yielded a positive return on investment of 17.25%.

Project 2.

My second project involved selling sport shoes. I intended to purchased 143 pairs of sport shoes

from the manufacturer at k300 per pair. I would sale each pair at k450 and I would incur
transportation costs totaling k5,500. To check for profitability of this venture, I first computed

the total expenses and total expected revenues.

Expected revenues = 143 x k450

Expected revenues = k64,350 

Total Costs = (143 x k300) + k5,500

Total Costs = k48,400

To obtain net profit, I subtracted total costs from the expected revenue.

Net Profit = Total Revenue – Total Costs

Net profit = k64,350 – k48,400

Net profit = K15,950

Therefore,

ROI= (net profit /cost of project) x 100.

ROI = (K15,950/ k48,400) x 100

ROI = 32.95%

The calculation yielded a positive return on investment of 32.95%. 

Conclusion
The positive ROI was an indication that both projects were profitable (Bigham & Goudreau

2004). ROI from the first venture shows that from the investment of k48,400, I would gain or

profit 17.25% and I would gain or profit 32.5% from the second venture using the same capital.

The low ROI value on first venture was an indication that the project was not profitable enough

compared to the higher ROI value on the second venture. From the calculations, I was able to

know that the first venture would be less successful and I avoided it moving forward. Hence, I

picked the second venture with a higher ROI. Although ROI is a good indicator of a performance

metric that is used in evaluation of an investment's profitability, it lacks focus on the financial

side of investment. Related benefits such as; customer satisfaction, employee motivation,

improving the image of the market etc. are also ignored in the ROI calculation.

References

Andolsen, A.A. (2004). Investing wisely for the future. The Information Management Journal,

September/October, 47-54

Bigham, J. D., & Goudreau, T. R. (2004). Return on investment in the public sector. MBA Thesis. Naval

Postgraduate School, Monterey, California.

Institute Staff, P. M. (2008, December 1). A Guide to the Project Management Body of Knowledge. In

(PMBOK Guide).