BIZOMAT Tools · Money
Return on Investment and NPV
Is this investment financially worthwhile?
Evaluates an investment with simple return and payback, then discounts the cash flows to give net present value and discounted payback.
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How this tool works
Inputs, units and where to find them
| Input | Unit | Typical source |
|---|---|---|
| Initial investment | $ | Quotations for purchase, installation and commissioning |
| Annual gross benefit | $ | Measured or estimated annual saving or extra contribution |
| Annual ongoing cost | $ | Ongoing maintenance, licences, consumables and support |
| Evaluation period | years | Useful life or the evaluation period your organisation uses |
| Discount rate (your approved rate) | % | Your organisation’s approved discount or hurdle rate (finance) |
What each input means
Open an input to see what it is, its units, the worked example and the common mistakes, with a small diagram.
What this means: Initial investment
- What it is
- The one-off cash you spend to get the investment working: purchase price plus installation, commissioning and any training needed before it delivers a benefit.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $1 or more.
- Example
- The form opens with $25000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A larger investment lowers ROI and NPV and lengthens both payback periods.
- Get it right
- Use the full installed cost from quotations, not just the equipment price; leaving costs out makes ROI and NPV look better than they are.
What this means: Annual gross benefit
- What it is
- The cash the investment brings in or saves in a typical year before ongoing costs: labour hours saved times rate, scrap avoided, or extra contribution from more sales.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more.
- Example
- The form opens with $18000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Raising it increases annual net benefit, ROI and NPV and shortens payback.
- Get it right
- Count only benefits that become real cash or capacity you will use; time freed up that nobody uses is not a saving.
What this means: Annual ongoing cost
- What it is
- The recurring cost of keeping the investment running each year: maintenance, licences, consumables, energy and support.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more.
- Example
- The form opens with $3000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- It is subtracted from the gross benefit, so a higher figure lowers every result.
- Get it right
- Ask suppliers for annual service and licence costs; software subscriptions are often missed.
What this means: Evaluation period
- What it is
- The number of years over which the benefits and costs are counted, normally the useful life of the asset or the period your organisation uses for appraisals.
- Units and format
- Enter a number in years: years. The form accepts 1 years to 20 years.
- Example
- The form opens with 3 years as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- More years add more discounted cash flows, so NPV rises; ROI and simple payback do not change.
- Get it right
- Do not stretch the period beyond the realistic life of the asset just to make NPV positive.
What this means: Discount rate (your approved rate)
- What it is
- The yearly rate used to convert future cash into today’s money, reflecting the cost of capital and risk. Your finance team usually sets it as a hurdle or discount rate.
- Units and format
- Enter a number in %: percent: the number is read as a percentage, so type 8 for 8 %. The form accepts 0% to 50%.
- Example
- The form opens with 8% as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher rate shrinks the present value of later years, lowering NPV and lengthening discounted payback.
- Get it right
- Type the percentage itself (8 for 8 %). A 0 % rate ignores the time value of money.
Method and formulas
- Annual net = benefit − ongoing cost
- Simple ROI = annual net ÷ investment
- Annuity factor = (1 − (1 + r)⁻ⁿ) ÷ r
- NPV = annual net × annuity factor − investment (end-of-year cash flows)
- Discounted payback = year in which cumulative discounted cash flow turns positive (interpolated)
Limitations
- Level annual cash flows; no growth, ramp-up or residual value
- Pre-tax; no financing, depreciation or tax effects
- Benefits must be real cash, avoided cost or used capacity
Typical uses
- Equipment and software purchases
- Improvement projects with a measurable annual benefit
- Comparing investments over the same period
Who it is for
- Business owners
- Operations and engineering managers
- Finance partners
What you get
- POSITIVE NPV, MARGINAL or NEGATIVE
- Simple ROI and payback
- NPV and discounted payback
Interpreting the result
- NPV above zero means the investment earns more than the discount rate
- A positive undiscounted total with negative NPV is marginal: the money comes back too slowly
- Use the sensitivity table to see how a benefit shortfall changes NPV
References
- Brealey R., Myers S. and Allen F., Principles of Corporate Finance (McGraw-Hill), net present value
Learn the Concepts Behind This Tool
These BIZOMAT Library readings explain the method this tool uses, with worked examples.
Method explained here · Library collection
NPV, IRR and payback answer different questions: reading investment measures when they disagree
In Investment Appraisal and Business Cases
What it covers: One option has the higher return percentage and faster payback; another creates more value. How to read NPV, IRR and payback together, spot when IRR misleads and make the trade-off visible.
BIZOMAT tools are screening and decision-support utilities. Verify important financial, engineering, safety, legal or operational decisions using appropriate professional standards and your organisation’s approved data.