The Most Common Mistake People Make In Calculating ROI

[88m3]

• Joe Knight

APRIL 9, 2015

Your company is ready to make a big purchase — a fleet of cars, a piece of manufacturing equipment, a new computer system. But before anyone writes a check, you need to calculate the return on investment (ROI) by comparing the expected benefits with the costs. Analyzing ROI isn’t always as simple as it sounds and there’s one mistake that many managers make: confusing cash and profit.

This is an important distinction because if you mistake profit for cash in your ROI calculations, you’re likely to show a far better return that you can expect in reality. So keep in mind: Profit is not the same thing as cash.

Sure, you may know this already, but people who haven’t studied finance often find this statement confusing. If a company earns a $500,000 profit in a calendar year, shouldn’t it have $500,000 more in the bank on December 31 than it did on January 1 of that year?

https://hbr.org/2015/04/the-most-common-mistake-people-make-in-calculating-roi

full article in link figured some of you would find this useful

 

[TLR Is Mental Poison]

There are people calculating ROI like this

U always have to do the analysis to completion, factoring everything in. I get pissed off when vendors send me ROI "analyses" with either no breakdown or no factoring in shyt like maintenance.

 

[Domingo Halliburton]

I always like net present value better

 

[Brown_Pride]

I always like net present value better

it's a makes more sense IMHO =NPV() isyour friend

 

[88m3]

There are people calculating ROI like this

U always have to do the analysis to completion, factoring everything in. I get pissed off when vendors send me ROI "analyses" with either no breakdown or no factoring in shyt like maintenance.

I'd say 90% of the time the numbers I see are bs.

 

[TLR Is Mental Poison]

I always like net present value better

Usually they go hand in hand. U cant have a strong NPV and a shyt ROI, I don't think.

 

[Domingo Halliburton]

Usually they go hand in hand. U cant have a strong NPV and a shyt ROI, I don't think.

true.

 

[☑︎#VoteDemocrat]

There are people calculating ROI like this

U always have to do the analysis to completion, factoring everything in. I get pissed off when vendors send me ROI "analyses" with either no breakdown or no factoring in shyt like maintenance.

These are the dudes calling themselves promoters

 

[Brown_Pride]

Usually they go hand in hand. U cant have a strong NPV and a shyt ROI, I don't think.

meh. NPV is based on estimated future discount values so you CAN have a good NPV and then have your discount rate go to shyt and your ROI go with it...

 

[TLR Is Mental Poison]

meh. NPV is based on estimated future discount values so you CAN have a good NPV and then have your discount rate go to shyt and your ROI go with it...

Yea picking a good discount rate is kind of a black art. I still dont understand it. My company uses 7.5%. Where are they parking money to get those returns, I want to go there.

 

[88m3]

Yea picking a good discount rate is kind of a black art. I still dont understand it. My company uses 7.5%. Where are they parking money to get those returns, I want to go there.

 

[Brown_Pride]

Yea picking a good discount rate is kind of a black art. I still dont understand it. My company uses 7.5%. Where are they parking money to get those returns, I want to go there.

private or public company? Optimism and tomfoolery often play a part. You can't mitigate risk with a high discount rate though, I've seen CFO's do that shyt to pitch big purchases only to have it come back and bite us in the ass. I was actually laid off from a place once after a shytty purchase justified by shoddy NPV calculations largely do to a shyt discount rate AND very optimistic future cash flows turned out to be exactly that...shytty. Company lost all types of money.