ROI, Payback and NPV

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.

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.

त्वरित जाँच: What does a positive NPV mean?

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