EROI vs AROI vs ROTI - CSU2029 - Shoolini U

EROI vs AROI vs ROTI

Expected ROI vs Actual ROI vs ROTI

Understanding the difference between Expected ROI, Actual ROI, and ROTI is crucial for evaluating the success of investments and initiatives. These metrics help in assessing the financial performance and effectiveness of projects, providing insights into their profitability and impact.

1. Expected ROI

Expected Return on Investment (ROI) is a projection of the profit or benefit that is anticipated from an investment relative to its cost. It is calculated before the investment is made, based on assumptions, forecasts, and historical data.

Expected ROI = (Expected Gain from Investment - Cost of Investment) / Cost of Investment

Example: If a company expects to earn $120,000 from an investment that costs $100,000, the Expected ROI is:

Expected ROI = ($120,000 - $100,000) / $100,000 = 0.20 or 20%

2. Actual ROI

Actual Return on Investment (ROI) is the real profit or benefit realized from an investment, calculated after the investment has been completed or over a certain period. It reflects the true financial outcome of the investment.

Actual ROI = (Actual Gain from Investment - Cost of Investment) / Cost of Investment

Example: If the same company ends up earning $110,000 instead of the expected $120,000, the Actual ROI is:

Actual ROI = ($110,000 - $100,000) / $100,000 = 0.10 or 10%

3. ROTI

Return on Time Invested (ROTI) is a metric that measures the value or benefit received relative to the time invested in a task, project, or activity. It is particularly useful for evaluating non-monetary investments where time is the primary resource.

ROTI = (Perceived Value or Benefit - Time Invested) / Time Invested

Example: If a professional spends 5 hours on a task that results in significant progress or learning, the ROTI might be evaluated based on the perceived value of that progress relative to the time spent.

While ROTI is often subjective, it helps in determining whether the time spent on an activity was worth the outcome achieved.

Comparing the Metrics

Together, these metrics provide a comprehensive view of an investment's performance, helping to make informed decisions and adjustments for future projects.