ROI Calculator Template

ROI Calculator Template

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Importance of an ROI Calculator

The function of an ROI calculator is to provide a standardized financial analysis method for developing the financial justification of IT projects and IT investments and determining their return on investment (ROI). The purpose of using a standardized ROI calculator is so that all projects in an organization’s project portfolio can be compared for approval and funding decisions based on the same criteria, even when they are unrelated initiatives.

Of course there are other methods of evaluating IT projects and IT investments for approval. Many of them were covered in my previous post on Evaluating IT Investments so I won’t cover them here.

NPV, IRR, and Payback

To illustrate the importance of using a standardized ROI calculator I thought some examples would help. Referring to Projects A and B, where each project requires and initial investment of $40,000 and will produce $75,000 of cash flow over the next 5 years. Many project sponsors and CIO’s would represent a simple ROI of $35,000 for each project.

ROI Calculator Example with NPV IRR and Payback

But the simple method does not account for the time value of money which says that a dollar expected sooner is worth more than a dollar expected later. The time value of money requires that future cash flows be discounted to their present value. Determining the discounted cash flow is done using the calculations for Net Present Value (NPV) and Internal Rate of Return (IRR).

Referring back to Projects A and B, we see that because Project A cash flow occurs later than those of Project B they are discounted more in the NPV calculation giving a lower IRR and longer payback period. By using NPV, IRR and Payback Period to evaluate the projects reveals Project B has a better ROI than Project A.

Project C offers another illustration with a higher initial investment and projected cash flows. But when evaluated using a discounted cash flow using NPV and IRR, Project C reveals a more favorable ROI than the numbers might suggest on their face.