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Long time since I took algebra, calculus or any math for that matter: what is the formula for calculating return on investment over period of years? If x = initial investment, y = present value and z = number of years?I could not find a formula on the site after a quick scan - if there is one just point me in the right direction.Thanks
ROI (aka profitability ratio) ... divide total assets into net profits, after taxes.
Here's a link to an article where TMF Ralegh discusses Return on Invested Capital (ROIC). Scroll down it and he gives links to several series of articles he's written on this kind of analysis.http://www.fool.com/BoringPort/1998/BoringPort981014.htmIf you're just asking for a simpler formula, how's this explanation:Let's say you invested $1,000 4 years ago and it's grown to $3,500. To figure the gain, you divide 3500 by 1000 and get 3.5. To see what that is per year, on average (i.e. annualized), you need to take the 4th root of 3.5. This gives you 1.37. Meaning you're earning about 37% per year. On my calculator, I have to raise 2.5 to the (1 divided by 4)th power to get the answer. So I punch in:3.5^(1/4)Hope that helps!Selena
In TMFSelena's example, shouldn't return on investment be $2,500 instead of $3,500?
Selena,If your example was 3 years. would you take the 3rd root (.33) of 3.5?Also--I don't understand what you did on the calculator.could you explain this again?Sorry for the math ignoranceDebbie
<<On my calculator, I have to raise 2.5 to the (1 divided by 4)th power to get the answer. So I punch in:3.5^(1/4)>>The above should have read:"I have to raise 3.5 to the..."Sorry!Selena
<<If your example was 3 years. would you take the 3rd root (.33) of 3.5?Also--I don't understand what you did on the calculator.could you explain this again?>>Yes, if the period was 3 years, you'd take the 3rd root. Regarding the calculator, it's just that many of them don't let you simply punch in the root you want to take. They may have a square root button, but no other root ones.In that case (since my calculator is in the group above), my workaround is this:-- For a period of 5 years, to take a 5th root, I punch in: (let's say I need the 5th root of 3.5)3.5 ^(1/5)The ^ is the exponent function key, appearing on my calculator as: "y^x", or y to the xth powerSince I can use parentheses on my calculator, I do. If yours doesn't offer it, you can do some of the math in an earlier step, figuring out that (1/5) is 0.2 or (1/3) is .33 or (1/4.5) is 0.222.Hope that helps!Selena
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