# ROI, Payback and NPV — Estimating AI Automation ROI

Source: https://www.skillbyai.com/en/ai-automation-roi/i-terms

> The vocabulary decision makers use.

## Three standard measures

**ROI** compares net gain with investment: (total benefits minus total costs) divided by the investment, over a stated period. **Payback period** is how long until cumulative net benefits cover the upfront investment. **Net present value (NPV)** discounts future cash flows to today's money using a discount rate (often set by finance), because money later is worth less than money now; a positive NPV means the project beats that rate. Always state the time horizon and whether figures are monthly or annual.

## ROI and payback for a simple case, run

I ran this with plain Python 3. All figures belong to one worked example (an invoice-processing team) with invented but internally consistent numbers; prices are placeholders. A $60,000 investment returning $45,000 net per year has a 3-year ROI of 125% and pays back in 16 months.

```python
investment = 60000          # one-off cost
annual_net_benefit = 45000  # benefit minus running cost per year
years = 3
roi = (annual_net_benefit * years - investment) / investment
payback_months = investment / (annual_net_benefit / 12)
print(f"3-year ROI: {roi:.0%}")
print(f"payback period: {payback_months:.1f} months")
```

Output:

```
3-year ROI: 125%
payback period: 16.0 months
```

## Ask finance for the discount rate

Use your organisation's standard discount rate and horizon so your case is comparable with other investments.

**Quiz:** What does a positive NPV mean?

- [x] The project returns more than the discount rate after accounting for timing
- [ ] The project has no costs
- [ ] Payback is instant
- [ ] ROI is exactly 100%

*Answer:* The project returns more than the discount rate after accounting for timing. NPV accounts for the time value of money.