---
name: roi-analysis
description: Use when asked to calculate or compare the return on investment (ROI) of a decision or initiative — net benefit relative to cost — as distinct from a [[budget-forecasting]] projection, which tracks overall income and expense over time rather than evaluating one specific investment decision.
---

# ROI Analysis

ROI (return on investment) analysis calculates and compares the return
a decision or initiative produces relative to what it costs. Its job is
to give a decision-maker a comparable number across competing options —
which project, which vendor, which initiative is worth funding — not to
produce a single impressive-looking figure in isolation.

## The basic formula

ROI = (net benefit − cost) ÷ cost, usually expressed as a percentage.
Net benefit is the value the investment produces; cost is everything
spent to produce it. The formula is simple; almost all of the real work
in ROI analysis is in defining "benefit" and "cost" honestly and
consistently enough that the resulting number actually means something.

## Time horizon and discount rate

An ROI figure is only comparable to another ROI figure calculated over
the same time horizon. A three-year ROI and a one-year ROI aren't
directly comparable even if the percentages look similar, because a
longer horizon has more time to accumulate benefit. When comparing
options with different horizons, or when future benefit is uncertain or
delayed, apply a discount rate so future value is expressed in present
terms — a dollar of benefit five years out is worth less than a dollar
today, and ignoring that overstates the appeal of longer-horizon
options.

## What to include as cost

Cost is easy to undercount by stopping at the upfront, visible price
tag. A complete cost figure includes ongoing and maintenance costs that
continue after launch — support, licensing renewals, staff time,
infrastructure, the vendor relationship's [[service-level-agreement]]
obligations — not just the initial purchase or build cost. An
initiative that looks like a strong ROI on upfront cost alone can look
much weaker, or negative, once its full ongoing cost is counted.

## Common pitfalls

- **Ignoring costs that continue after launch** — counting only the
  upfront investment and omitting maintenance, support, or renewal costs
  systematically overstates ROI.
- **Comparing ROI figures calculated over different time horizons as if
  they were equivalent** — a higher percentage over a longer horizon
  isn't necessarily the better option once compared on the same basis.
- **Treating a rough estimate as more precise than the underlying
  assumptions justify** — presenting a single decimal-precision ROI
  number when the input assumptions are themselves rough estimates
  creates false confidence; a range is more honest than a false point
  estimate.
- **No discount rate applied when comparing options with different
  timing** — makes a slower option with distant benefits look more
  attractive than it actually is in present-value terms.
- **Benefit defined inconsistently across options being compared** — if
  one option's "benefit" includes soft, unquantified value and another's
  doesn't, the comparison isn't actually apples to apples.

## Learn more

- [[budget-forecasting]] for the ongoing, org-wide projection of income
  and expense that a single ROI analysis feeds into rather than
  replaces.
- [[break-even-analysis]] for a related calculation focused on the point
  where cumulative return covers cumulative cost, rather than a ratio.
- [[unit-economics]] for the per-unit cost and revenue figures that
  often underlie an ROI calculation.
- [[feasibility-analysis]] for the broader evaluation of whether an
  initiative is viable at all, of which ROI is typically one input.