This document discusses key concepts for evaluating investments: 1. ROI (Return on Investment) measures the profit or return from an investment compared to the cost of the investment. A higher percentage ROI means a more profitable investment. 2. NPV (Net Present Value) discounts future cash flows from an investment to determine if it has a positive or negative value today. A positive NPV means the investment should be accepted. 3. Payback Period is the number of years for an investment to recover its initial cost from cash flows. Shorter payback periods are preferable. The document provides formulas and examples to calculate ROI, NPV, and Payback Period to evaluate potential investments. References are also

1. ASSALAMU’ALAIKUM
INFORMATION TECHNOLOGY MANAGEMENT
ROI, NVP, AND PAYBACK PERIOD
Return on Investment, Net Present Value and
Payback Period
Disajikan Oleh :
RAHMAD KURNIAWAN
P68500

2. Contents
1. ROI
2. NPV
1. NPV on “Chapter 17, Exercises and
Project, No.2”
3. Payback Period
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3. What is ROI?
ROI can be defined as:
 One of several approaches to building a
financial business case (Solution Matrix).
 A performance measure used to evaluate
the efficiency of an investment.
 A performance measure to compare the
efficiency of different investments.
 ROI is a metric that yields some insights
into how to improve business results in the
future (L. Dombrowski)
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4. Cont...
 Another traditional tool for evalating capital
investments is return on investment
(ROI), which measures the effectiveness of
management in generating profits with its
available assets. (Turban)
 The ROI measure is a percentage, and the
higher this percentage return, the better.
 It is calculated essentially by dividing net
income attributable to a project by the
average assets invested in the project.
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5. Simple ROI
The benefit (return) of an investment
is divided by the cost of the
investments. The result is expressed
as a percentage or a ratio. This is
referred to as “simple ROI”.
ROI= Gains from investment – Cost of investment
Cost of Investment
$700,000 - $500,000 = 40%
$500,000
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6. Example of ROI
For example, a $1000 investment that
earns $50 in interest obviously
generates more cash than a $100
investment that earns $20
interest, but the $100 investment
earns a higher return.
So...
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7. Cont...
$1050 $1000 $50
ROI $50 / 1000 5%
$1000 $1000
$120 $100 $20
ROI $20 / 100 20%
$100 $100
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8. What is NPV?
NPV can be defined as:
 NPV is one of Capital budgeting analysis uses
standard financial models. (Turban)
 Net present value is the present value of net
cash inflows generated by a project including
salvage value, if any, less the initial
investment on the project.
If NPV > 0, accept
If NPV < 0, reject
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9. Cont...
Organizations often use net present
value (NPV) calculations for cost
benefit analyses.
In an NPV analysis, analysts convert
future values of benefits to their
present-value equivalent by
discounting them at the
organization’s cost of funds.
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10. NPV Formula
C1 C2 CT
NPV C0 
(1 r )1 (1 r ) 2 (1 r ) T
 Where,
 r is the target rate of return per period;
 C0 is the Initial investment.
 C1 is the net cash inflow during the first period;
 C2 is the net cash inflow during the second period;
 C3 is the net cash inflow during the third period, and so
on ...
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11. Example of NPV
There is an opportunity to invest in a
business that will pay $200,000 in
one year, $400,000 in two
years, $600,000 in three years and
$800,000 in four years. It can earn
12% per year compounded annually
on a mutual fund that has similar risk.
If it costs $1.2 million to start this
business, should be invest?
So...
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12. Cont...
0 1 2 3 4 years
| | | | |
| | | | |
CF –$1.2 mil $200,000 $400,000 $600,000 $800,000
 Discount rate = 12%
C1 C2 CT
NPV C0 
(1 r )1 (1 r ) 2 (1 r ) T
200,000 400,000 600,000 800,000
NPV 1,200,000
(1.12)1 (1.12) 2 (1.12) 3 (1.12) 4
= $232,932
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13. Resources of data based on exercisesNo. 2
Investing $ 15.000.000 Revenue year 1 $ 4.000.000
Cost, Year 1 $ 2.000.000 Revenue, year 2 $ 5.000.000
Cost, Year 2 $ 2.000.000 Revenue, year 3 $ 5.000.000
Cost, Year 3 $ 1.500.000 Revenue, year 4 $ 5.000.000
Cost, Year 4 $ 1.500.000 Revenue year 5 $ 5.000.000
Cost, Year 5 $ 1.500.000 Total $ 24.000.000
Total $ 23.500.000
Interest rate 10%
Assumed first year include investment and
cash flow year 1 $ (13.000.000) cost
cash flow year 2 $ 3.000.000
cash flow year 3 $ 3.500.000
cash flow year 4 $ 3.500.000
cash flow year 5 $ 3.500.000
NPV= $ (2.145.469,45)
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14. What is Payback Period?
Payback Period can be defined as:
 Number of years needed to recover the initial
cash outlay of a project
Computation
 Estimate the cash flows
 Subtract the future cash flows from the initial
cost until the initial investment has been
recovered
Decision Rule – Accept if the payback
period is less than some preset limit
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15. Example of Payback
Example:
 Project with an initial cash outlay of $10,000
Free Cash Flows of $2,500 per year for 6
years
 Year Cash Flow Balance
$10,000
1 $2,500 $7,500
2 $2,500 $5,000
3 $2,500 $2,500
4 $2,500 --------
Payback is 4 years
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16. References
 Turban, McLean, Wetherbe. Information
Technology for Management: Transforming
Organizations in the Digital Economy (4th
edition)
 Turban, Volonin, Wood. (2012).
Information Technology for Management,
8th edition. John Wiley & Sons (Asia) Pte
Ltd.
 http://www.cwu.edu/
 http://www.passitoncenter.org
 http://business.fullerton.edu
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17. Thank you
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