Return on Investment – The percentage of how much money has been made compared to an initial investment. (i.e. 100% ROI means someone doubled their money). It is an easy way to measure the effectiveness of a variety of investments that otherwise might have little in common to compare. ROI can provide investors with a simple way to eliminate certain investments or to choose the best options given their available capital.
ROI can be used in conjunction with Rate of Return, which takes in account a project’s time frame. One may also use Net Present Value (NPV), which accounts for differences in the value of money over time, due to inflation. The application of NPV when calculating rate of return is often called the Real Rate of Return.