The Return on Investment Calculator is an Excel tool that helps you to understand the financial soundness of investments. Launching a new product or service often requires financial investments. It is important to consider if these investments can be earned back by the new product. It helps you to calculate if your earnings are enough to recover initial investments.
Download the Return on Investment Calculator to estimate if the return of your product will cover the initial investments. This tool can easily be used by yourself.
The Return on Investment Calculator helps you to consider the costs and revenue when you are about to launch a product or service, or even when you just have an idea. With this calculator you can calculate your return on investment, and also the payback period. To be able to make these calculations you need to make some estimations.
Step 1: the investment
Start with estimating how much the new product or service will cost you. Think of needed machines, buildings, knowledge, or other things that you will need to be able to create your product. The investment does not include the costs for materials or personnel needed for creating a product. So only include the initial purchasing costs, not the maintenance costs.
Step 2: taxes
A part of your income needs to be paid to the government or state as a corporate tax, also known as income tax. This tax is applied to the net profit, so the revenue minus the costs. Enter the right tax percentage for your country or region. You can choose to skip this step, but it will give you a distorted picture of how much you will earn.
Step 3: products sold
Forecast how many products you will sell in de upcoming years. The chance that you will earn back your investment within less than a year is slim. Therefore, a forecast of how many products you sell is made over several years. You can choose for how many years you want to calculate your return. Keep in mind that a longer period bears more risk since there is a higher chance that your estimations are wrong. Estimate the number of products that you will sell in each year. You can choose to estimate for one till five years.
Step 4: price
What is the price that you will ask for each product? Enter the price of your product on the sheet. Think about whether you are going to increase or decrease your price during the years. If you think that your price will change within a year then take the average price.
Step 5: variable cost per product
How much does it cost to make one product? Determine the costs for making just one product. Only include those costs that are variable, meaning those costs that only exist when a product is being made. Think of materials, production materials or labor. Enter the variable costs per product for each year of your estimation.
Step 6: fixed costs
What are the costs regardless of the amount of products made? Determine the fixed costs of the production line. Think of loans, insurance, rent, gas, electricity, water or phones. Fixed costs are costs that occur independent of the number of products made. Enter the fixed costs for each year of your estimation.
Step 7: return on investment and payback period
Once you have entered all the necessary information, you get the results. The first result is the return on investment. If it says that there is a “negative return on investment” it means that you have not earned back your investment. When the return of investment shows a percentage it means that at the end of the period you have earned back your investment and even more than that. For example, if you made a €1.000 investment and the return on investment shows 75%, you have earned back the €1.000 and at the end of the period you have €750 in addition. In total you have earned €1.750.
The second result shows you the payback period. If it says that “the investment is not earned back”, it means that you did not make enough money at the end of the period to cover the initial investments. When the payback period shows a number it means that within that number of years the investment is earned back.
Since the calculations are based on estimations there is no way in saying if this will be the actual return and payback period. However, it does give an indication to whether it is a profitable idea or not. It can also show you that you need to adjust your price or increase your sales effort.