Return on Investment (ROI)
For project justification, ROI estimates the profit a project is expected to generate. Compute it by taking expected revenue minus expected costs to get the net gain, then divide that net gain by the expected costs to express the return as a rate.
Key Points
- ROI measures expected profitability to help justify or compare projects.
- Formula: ROI = (Expected revenue - Expected cost) / Expected cost.
- Expressed as a percentage; higher ROI is generally preferred when scope and time horizon are comparable.
- Limits: does not reflect timing of cash flows, risk, or scale; consider with NPV/IRR for a fuller view.
Example
A project is expected to earn 1,500,000 USD in revenue with 1,200,000 USD in costs. Net benefit = 300,000 USD; ROI = 300,000 / 1,200,000 = 0.25, or 25%.
PMP Example Question
During project selection, a sponsor compares two proposals. Project Alpha expects 900,000 USD in revenue and 600,000 USD in costs. Project Beta expects 1,200,000 USD in revenue and 950,000 USD in costs. Based on ROI, which project should be selected?
- Project Alpha, ROI = 50%
- Project Beta, ROI ≈ 26%
- They are equal; ROI = 33%
- Neither; ROI cannot be used before execution
Correct Answer: A — Project Alpha
Explanation: Alpha ROI = (900,000 - 600,000) / 600,000 = 0.50 (50%). Beta ROI = (1,200,000 - 950,000) / 950,000 ≈ 0.263 (26%). Choose the higher ROI.
