Return on investment

In finance, the return on investment (ROI) or just return is a calculation used to determine whether a proposed investment is wise, and how well it will repay the investor. It is calculated as the ratio of the amount gained (taken as positive), or lost (taken as negative), relative to the basis.

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The analysis of the return on investment is either done by static or dynamic formal methods, which may be distinguished by the role of time in the model chosen. Dynamic models take account of the fact that a later date of payment may be valued inferior in a model with interest rates. In other words, static approaches can be regarded as sufficient, if the distribution of payments in each period may be assumed as equal to others. All basic ROI-Models are deterministic, for instance the well-known Total Cost of Ownership Model by the Gartner Group. Deterministic models assume the security of prediction. Abandoning this leads into the wide sphere of risk-aware-models, that are inspired by the mathematics of insurances.

Related Topics:
Total Cost of Ownership - Gartner Group

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