Project Management guide · Cost and resources
Return on Investment (ROI) for Projects: Formula and Examples
Return on investment (ROI) measures how much a project gains relative to what it costs, expressed as a percentage. The basic formula is ROI = (net benefit / cost) x 100, where net benefit is total benefits minus total costs.
Key takeaways
- ROI = net benefit / cost x 100.
- Always state the time period and include all costs.
- Pair ROI with payback and NPV, because basic ROI ignores timing.
- Measure actual ROI after delivery to confirm benefits.
The formula
ROI = (total benefits - total costs) / total costs x 100
- A positive ROI means benefits exceed costs.
- ROI is simple and easy to communicate, but basic ROI ignores when the money arrives.
- State the time period, for example three-year ROI.
Worked example
A project costs $100,000 and produces savings of $40,000 a year for three years.
- Total benefits = 3 x 40,000 = $120,000.
- Net benefit = 120,000 - 100,000 = $20,000.
- Three-year ROI = 20,000 / 100,000 x 100 = 20%.
- Payback period = 100,000 / 40,000 = 2.5 years.
Using discounted figures at 8%, the NPV is about $3,084, so a discounted ROI would be about 3,084 / 100,000 = 3.1%. The difference shows how much timing matters.
ROI compared with other measures
| Measure | Answers | Considers timing? |
|---|---|---|
| ROI | How much do we gain per dollar invested? | No (basic form) |
| Payback period | How quickly do we get our money back? | Partly |
| Net present value | How much value is created in today's money? | Yes |
| Internal rate of return | What rate of return does the project earn? | Yes |
| Benefit-cost ratio | How many dollars of benefit per dollar of cost? | Usually yes |
How to calculate project ROI
- Agree the time period and what counts as a benefit.
- List all costs: build, running, training, support and internal staff time.
- Estimate benefits: revenue, savings and avoided costs. Exclude benefits that would happen anyway.
- Calculate net benefit and ROI.
- Add payback and NPV for a fuller picture.
- After the project, measure the actual ROI as part of benefits realisation.
Common pitfalls
- Leaving out ongoing costs, which inflates ROI.
- Comparing ROIs measured over different time periods.
- Counting soft benefits, such as time saved, as cash without a plan to realise them.
- Ignoring risk: a high ROI on uncertain benefits may be worth less than a modest certain one.
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Frequently asked questions
What is ROI in project management?
Return on investment: the net benefit of a project divided by its cost, expressed as a percentage.
What is the ROI formula?
ROI = (total benefits - total costs) / total costs x 100.
What is a good ROI for a project?
It depends on the organisation's targets, risk and alternatives. Finance teams often set a minimum hurdle.
What is the difference between ROI and NPV?
ROI is a percentage that usually ignores timing; NPV is a money value that discounts future cash flows.
How do you calculate payback period alongside ROI?
Initial investment divided by annual net cash inflow, if inflows are even. $100,000 / $40,000 per year = 2.5 years.
Can ROI be negative?
Yes. A negative ROI means the project costs more than it returns over the period measured.
How do you measure ROI for internal projects?
Value the savings, avoided costs or productivity gains, and agree how they will be measured after delivery.
Should internal staff time be included in ROI?
Yes. Staff time has a cost even if it is not a new payment, so include it.
When should ROI be measured?
Estimated in the business case, then measured after delivery once benefits have had time to appear.
What is annualised ROI?
ROI converted to an equivalent yearly rate, useful when comparing investments over different periods.
What is the difference between ROI and cost-benefit analysis?
ROI is one result; a cost-benefit analysis is the full comparison of costs and benefits that it can come from.