DTU ProjectLab - User contributions [en-gb]

Return on Investment (ROI)

2023-05-09T21:29:27Z

Mariely: /* Limitations */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss, as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, project managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for project managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, project managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the project manager will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK, and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating a loss for the company, and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the project manager will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and project managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes project managers make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which project managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:29:11Z

Mariely: /* Common mistakes */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss, as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, project managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for project managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, project managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the project manager will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK, and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating a loss for the company, and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the project manager will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and project managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes project managers make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:28:47Z

Mariely: /* Budgeting and fundraising */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss, as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, project managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for project managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, project managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the project manager will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK, and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating a loss for the company, and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the project manager will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and project managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:27:31Z

Mariely: /* Project selection */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss, as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, project managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for project managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, project managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the project manager will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK, and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating a loss for the company, and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the project manager will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:25:29Z

Mariely: /* Project Evaluation */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss, as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, project managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for project managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, project managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the project manager will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK, and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating a loss for the company, and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the project manager will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:24:51Z

Mariely: /* Project Evaluation */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss, as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, project managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for project managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, project managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK, and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating a loss for the company, and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the project manager will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:23:13Z

Mariely: /* Applications of ROI in Project Management */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss, as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, project managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for project managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK, and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company, and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:22:36Z

Mariely: /* Applications of ROI in Project Management */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss, as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, project managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for project managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:19:54Z

Mariely: /* Classification of ROI */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss, as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, project managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:19:27Z

Mariely: /* Classification of ROI */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss, as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:19:08Z

Mariely: /* Classification of ROI */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also bear in mind the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:18:37Z

Mariely: /* Classification of ROI */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also take into account the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening for the US as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:18:05Z

Mariely: /* Classification of ROI */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (check graph 1 to see the average ROI for different sectors in the US).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also take into account the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:12:37Z

Mariely: /* Classification of ROI */

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it should be noted that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, such as level of risk, another approach should be used.

Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex, as different industries and companies tend to set different benchmarks. Benchmarking is indispensable because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (Check graph 1).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also take into account the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:03:26Z

Mariely:

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it is important to highlight that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, decision-must take another approach.
Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex as different industries and companies tend to set different benchmarks. Benchmarking is important because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (Check graph 1).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also take into account the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T21:00:23Z

Mariely:

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in ProjectManagement. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it is important to highlight that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, decision-must take another approach.
Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex as different industries and companies tend to set different benchmarks. Benchmarking is important because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (Check graph 1).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also take into account the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T20:55:22Z

Mariely:

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project, Portfolio, and Program Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made . Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it is important to highlight that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, decision-must take another approach.
Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex as different industries and companies tend to set different benchmarks. Benchmarking is important because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (Check graph 1).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also take into account the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T20:49:27Z

Mariely:

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it is important to highlight that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, decision-must take another approach.
Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex as different industries and companies tend to set different benchmarks. Benchmarking is important because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (Check graph 1).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also take into account the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

'''Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.'''

Chapter 4 focuses on project performance domains as it reflects on the importance of measuring projects' performance

'''CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi'''

This website that provides information on return on investment (ROI) rankings, valuations, and fundamental analysis for US stocks.

'''Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project'''

This page provides an overview of ROI and its application. It is good to understand the basics for the calculation of this KPI and how it can be used to evaluate projects.

=References=

<references>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T20:48:20Z

Mariely:

Return on Investment (ROI)

2023-05-09T20:16:15Z

Mariely:

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project, Portfolio, and Program Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made <ref name="Rowan" />. Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions<ref name="x6" />. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders <ref name="x6" />. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track <ref name="x6" />.

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as <ref name="x1" />:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below<ref name="x1" />:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project <ref name="x1" />.
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs <ref name="x2" />.
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed<ref name="x3" />:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in <ref name="x3" />)

Furthermore, it is important to highlight that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, decision-must take another approach.
Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex as different industries and companies tend to set different benchmarks. Benchmarking is important because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value <ref name="x6" />. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors <ref name="x5" /> (Check graph 1).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also take into account the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations <ref name="x6" />.

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening as of Q1 of 2023. Source: Adapted from CSIMarket <ref name="x5" />]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI <ref name="x1" />.

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project <ref name="x1" />. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits <ref name="x1" />.

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return <ref name="x1" />. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements <ref name="x13" />.
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied <ref name="x10" />.
*'''Easy comparison''' – it can be used to compare diverse investment plans <ref name="x13" />.

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes <ref name="x9" />.

'''Example 1'''

Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:

<math>ROI=\frac{(18,150,000-15,000,000)}{15,000,000}\times 100=21%</math>

This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).

'''Example 2'''

Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:

<math>ROI = \frac{-14{,}000{,}000}{98{,}000{,}000} \times 100 = -14.3%</math>

The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).

==Project selection==

ROI helps Project managers compare and prioritize project proposals based on their forecasted return <ref name="x7" />. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives <ref name="x9" />.

'''Example 3'''

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.

{| class="wikitable"
|-
!Project
!ROI
|-
|Project A
|17%
|-
|Project B
|5%
|-
|Project C
|7.2%
|-
|Project D
|25%
|-
|Project E
|4.5%
|-
|}
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)

They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

==Budgeting and fundraising==

ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project <ref name="x8" />. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.

==Common mistakes==

There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:

*'''Failure to include all costs''' – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable <ref name="x14" />. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
*'''Confusing financial gains with net profit''' – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment <ref name="x14" />. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.

=Limitations=

Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

*'''Time value of money''' - ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future<ref name="x10" /> <ref name="x11" />. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

*'''Limited scope''' - Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them <ref name="x12" />. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

=References=

<references>

<ref name="Rowan">J. Rowan, (2018). "The Importance of ROI in Project Management". Journal of Business and Economics Research. 6(8), pp. 195-202.</ref>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

<ref name="x1">Harrison, B. (2021, March 18). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x2">ProjectManagement.com. (2014, April 21). Demystifying return on investment (the ROI). ProjectManagement.com. https://www.projectmanagement.com/blog/blogPostingView.cfm?blogPostingID=24708&thisPageURL=/blog-post/24708/Demystifying-Return-On-Investment--the-ROI--#_=_</ref>

<ref name="x3">Project Management Academy. (2021, April 22). Return on Investment: Understanding ROI in Project Management. Project Management Academy. https://projectmanagementacademy.net/resources/blog/return-on-investment/</ref>

<ref name="x5">CSIMarket. (n.d.). Return on Investment (ROI) Ranking, Valuation & Fundamental Analysis for US Stocks. Retrieved May 10, 2023, from https://csimarket.com/screening/index.php?s=roi</ref>

<ref name="x6">Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition. Project Management Institute.</ref>

<ref name="x7">Thiry, M. (2010). Program management: A strategic decision management process. CRC Press.</ref>

<ref name="x8">Mir, F. A., & Pinnington, A. H. (2014). Exploring the value of project management: Linking Project Management Performance and Project Success. International Journal of Project Management, 32(2), 202-217. https://doi.org/10.1016/j.ijproman.2013.05.012</ref>

<ref name="x9">Harvard Business School Online. (2021, January 14). How to Calculate ROI for a Project. Harvard Business School Online Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="x10">Corporate Finance Institute. (n.d.). Return on Investment (ROI) Formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/return-on-investment-roi-formula/</ref>

<ref name="x11">Investopedia. (n.d.). Time Value of Money (TVM). Retrieved May 9, 2023, from https://www.investopedia.com/terms/t/timevalueofmoney.asp</ref>

<ref name="x12">Harvard Business Review. (2021). ESG Impact Is Hard to Measure — But It’s Not Impossible. Retrieved from https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible</ref>

<ref name="x13">Bharti AXA. (2021). What is Return on Investment (ROI) and Benefits? Bharti AXA. https://www.bhartiaxa.com/be-smart/investments/what-is-return-on-investments-and-benefits</ref>

<ref name="x14">Gough, O. (2017, December 5). The most common mistakes small businesses make in calculating ROI. SmallBusiness.co.uk. Retrieved from https://smallbusiness.co.uk/common-mistakes-calculating-roi-2541803/</ref>

</references>

Return on Investment (ROI)

2023-05-09T18:33:32Z

Mariely:

=Abstract=

The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project, Portfolio, and Program Management. It provides valuable insight into the effectiveness and efficiency of investment decisions made <ref name="Rowan" />. Project managers use ROI to evaluate the overall impact that investments have had on the organization <ref name="Stobierski" />. It may also be employed to compare the performance of various projects and identify which should be given priority in the future <ref name="Stobierski" />.

ROI is obtained through the quotient of profit and funds invested <ref name="Stobierski" />. This metric is favoured for its ease of calculation and ability to facilitate comparisons between investment options. Despite its popularity, it is crucial to acknowledge that ROI does not factor in the time value of money, unlike other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) <ref name="Daerden" /> <ref name="Birken" />. This limitation should be taken into consideration when using ROI to evaluate the performance of a project.

This article will explore the concept and practical applications of the ROI method. It will start by outlining the principles behind the use of ROI and then delve into its calculation. To ensure objectivity, the limitations of the method will be discussed. Finally, a section will be dedicated to presenting an annotated bibliography of key references utilized in the preparation of the article.

__TOC__

=Big Idea=

Measurement is an important component of project management since it allows Project Managers (PMs) to track progress, detect possible problems, and make educated decisions[x6]. By defining clear key performance indicators (KPIs), PMs may evaluate projects' performance and verify whether it matches the objectives set close with the stakeholders[x6]. Effective measurement also provides actionable data that can facilitate decision-making and help keep the project on track[x6].

==Return on Investment and Formula==

Return on Investment (ROI) is a financial metric used to assess the profitability and efficiency of an investment and it may also serve as a comparison tool between multiple investments. The ROI calculation is considered rather easy and fast and its formula is often presented as [x1]:

<math>ROI=\frac{Net\ Profit}{Cost\ of\ Investment}\times 100</math>

In project management, however, to make it easy for Project Managers to understand, the variable “Net Profit” is deconstructed as can be seen below[x1]:

<math>ROI=\frac{Financial\ Value-Project\ Cost}{Project\ Cost}\times 100</math>

Be aware of the different variables:

* '''Financial Value''' – refers to the total revenue generated by a project [x1]
* '''Project Cost/Cost of Investment''' – represents all the costs incurred for the implementation of the project. It includes both direct and indirect costs [x2]
* '''Net Profit''' – it is the difference between the financial value and the project cost.

==Classification of ROI==

Once the ROI has been calculated, it is important to assess it, in order to understand how a project has performed. This KPI can take different values and the classification of the results is done as followed[x3]:

{| class="wikitable"
|-
! Condition
! Idea
|-
| Negative ROI
| Unprofitable. The project has generated a loss as the value of the return is lower than the cost of the investment.
|-
| Zero ROI
| Breakeven. The project has generated a return that is equal to the cost of investment.
|-
| Positive ROI
| Profitable. The project has generated a profit as the value of the return is higher than the cost of investment.
|}
(Table 1: Classification of the value of ROI. Source: Created by the author based on information found in [x3])

Furthermore, it is important to highlight that the higher the ROI, the higher the profit a project generates. Thus, when choosing between projects, decision-makers should always choose the one with the highest ROI. It is important to only take this into account when this is all the data given. When other variables are available, decision-must take another approach.
Despite this classification, the assessment of what is considered a “good” or “bad” ROI is a bit more complex as different industries and companies tend to set different benchmarks. Benchmarking is important because by comparing one’s return on investment with others, it allows the maximization of profits as one does not settle purely for a positive value[x6]. CSIMarket does a ROI ranking by sector where companies can go and check what is the average return from other competitors [x5] (Check graph 1).

Moreover, when setting the criteria for a “good” ROI, Project Managers must also take into account the results of similar projects conducted by the company they are in, the organizational goals, and last but not least, the stakeholders’ expectations[x6].

[[File:Roi_per_sector.png|thumb|700px|right|Graph 1: Return On Investment Screening as of Q1 of 2023. Source: Adapted from CSIMarket [x5]]]

==Types of ROI==

ROI can be calculated during several phases of a project and depending on when it is done, it can take two different forms: expected (or anticipated) and actual ROI[x1].

Expected ROI is an estimation of the value a project can bring if decision-makers choose to pursue it. It is calculated before a project starts and serves to predict the profitability of a project[x1]. On the other hand, actual ROI is typically calculated by the end of the project and, therefore, accounts for true costs and profits[x1].

Note that one does not substitute for the other, they complement each other. When the expected ROI is calculated for an initiative and decision-makers decide to invest in it, it means that they expect a positive return[x1]. By the end, once the project is completed, the Project Managers calculates the ROI once again, in order to check whether the expectations were met. There might be three different outcomes:

*Expected ROI = Actual ROI – this means that the project performed as expected.
*Expected ROI > Actual ROI – this means that the project underperformed. And if the actual ROI is lower than zero, it even indicates that it generated losses.
*Expected ROI < Actual ROI – this means that the project exceeds expectations and has generated even more value than what was initially forecasted.

==Benefits of ROI==

There are numerous benefits to using ROI, including:

*'''Easy to calculate''' – the formula is straightforward, and the values needed should be visible in financial statements[x13].
*'''Universally understood and accepted''' – it is a globally used KPI and, therefore, most people have some sort of knowledge about what it concerns and how it is applied[x10].
*'''Easy comparison''' – it can be used to compare diverse investment plans[x13].

=Applications of ROI in Project Management=

As has been stated, ROI is a crucial tool for Project Managers as it provides a useful overview of their projects. Let us look at the examples below of how this metric can be applied for a more in-depth understanding of its application and interpretation.

==Project Evaluation==

ROI can be used to measure how well a project has performed and determine whether or not it has met its financial goals. To assess if a project was successful or not, Project Managers should compare its actual ROI to its predicted ROI. This enables them to learn from their poor or good performance and enhance future decision-making processes[x9].
Example 1
Company X operates in the technology sector, and it has just delivered Project Alpha. Next week, the PM will have a meeting with key stakeholders, and he must show them how the project performed. He knows that the expected ROI was 16%, the financial gains were 18,150,000DKK and it had a cost of 15,000,000DKK. Thus, the actual ROI is:
ROI= (18,150,000-15,000,000)/15,000,000×100=21%
This means that for every Danish krone (DKK) invested, there was a return of 0.21DKK. Since actual ROI > 0 and actual ROI > expected ROI, the project has not only generated profit but has also exceeded expectation. The stakeholders should be very happy when they hear the news, especially because the return is also higher than the average for the technology sector (see Graph 1).
Example 2
Company X has another project which was recently delivered. The project deadline was postponed by two years due to unforeseen problems. Its net profit was -14,000,000DKK, the cost was 98,000,000DKK and the expected ROI was the same as the average for the technology sector in Q1 of 2023, 15.35%. Therefore, the actual ROI is:
ROI= (-14,000,000)/98,000,000×100=-14.3%
The negative ROI means that the project ended up generating loss for the company and it fell far behind the goal initially set. The meeting with the stakeholders will not be easy and the PM will have to thoroughly explain why the project failed to deliver (it was most likely due to the unplanned events which prolonged the project duration and made it more expensive).
Project selection
ROI helps Project managers compare and prioritize project proposals based on their forecasted return[x7]. This way, they are also able to effectively allocate available resources to the most promising tasks and initiatives[x9].
Example 3:

In order to illustrate this situation, take Company X and the five projects decision-makers have been contemplating inventing.
Project ROI
Project A 17%
Project B 5%
Project C 7.2%
Project D 25%
Project E 4.5%
(Table 2: Forecasted ROI for projects in Company X. Source: Created by author)
They were informed that only four out of the five projects can move to the next phase. Without being provided with any other additional information, which one should they choose? A quick look at Table 2 would allow them to see that Project E should be discarded as its ROI is the lowest of the group.

Budgeting and fundraising
ROI can help project managers justify project expenditures to stakeholders by demonstrating the financial benefits of a project [x8]. It is a good tool to gain stakeholders’ support. Besides, its simplicity makes it easy for everyone to understand and Project Managers do not need to spend much time explaining what it entails.
Common mistakes
There are many mistakes PMs make when calculating ROI and that can lead them to an inaccurate value that does not express the performance of an investment. Some of the most common are:
Failure to include all costs – all costs associated with the project must be included in the calculation, otherwise the result will not be reliable[x14]. It is important to make sure personnel expenses and indirect costs, such as rent and utilities, are not forgotten.
Confusing financial gains with net profit – when unfamiliar with the different terms presented in the ROI formula, some people tend to think that “Net profit” refers exclusively to all the cash inflow registered for the investment[x14]. This is not true as was explained in subsection 2.1. This should be avoided as the ROI would be much better than what it is in reality.
Limitations
Although ROI is a valuable metric for evaluating projects' performances and investment decisions, it has certain limitations of which Project Managers should be aware.

Time value of money: ROI does not consider the time value of money, which is the concept that money is worth more in the present than in the future[x10][x11]. This means that, for example, today 200DKK is worth more than it will be tomorrow, in a week, in a few months or in years. Other metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to complement ROI and help provide a more precise assessment.

Limited scope: Since non-financial factors such as social and environmental impacts are quite difficult to measure, most of the time ROI does not consider them[x12]. This means that ROI may not provide a complete picture of the value of an investment. Additionally, ROI does not consider the risk associated with an investment. Two investments may have the same ROI, however, one may be much riskier than the other.

=Annotated bibliography=

=References=

<references>

<ref name="Rowan">J. Rowan, (2018). "The Importance of ROI in Project Management". Journal of Business and Economics Research. 6(8), pp. 195-202.</ref>

<ref name="Stobierski">Stobierski, T. (2020, May 12). How to Calculate ROI to Justify a Project | HBS Online. Business Insights - Blog. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project</ref>

<ref name="Daerden">Dearden, J. (1969, May 1). The Case Against ROI Control. Harvard Business Review. https://hbr.org/1969/05/the-case-against-roi-control</ref>

<ref name="Birken">Birken, E. G. (2021, March 17). Understanding Return On Investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/roi-return-on-investment/</ref>

</references>

File:Roi per sector.png

2023-05-09T18:24:22Z

Mariely:

Return on Investment (ROI)

2023-03-12T15:51:12Z

Mariely: /* Discussion */

Return on Investment (ROI)

2023-02-19T16:49:42Z

Mariely:

Articles Spring Term 2023

2023-02-14T09:58:08Z

Mariely:

=Overview of 2023 Wiki Collections=

{| class="wikitable sortable"
|+Spring Term 2023 Wiki Collections
|Group 23
|Foteini
|Pange
|s222872
|New? / revised?
|[[Stakeholder and Social Network Analysis]]
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|Ali
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|Papadaki Fanioudaki
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|Michalis
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|s220253
|New? / revised?
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|Sofie
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|Nikolaos
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|Anna
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|Martin
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|Johannes Nicolás
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|Nicolas
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|Ingo
|Baur
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|S184965
|New? / revised?
|[[The HEXACO Model of Personality Structure]]
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|Mathias
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|S174750
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|Group 10
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|Pieters
|s184149
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|Lillian
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|S174726
|New? / revised?
|[[The Stage Gate process: A powerful method used for efficient project management]]
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|Julie
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|s223228
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|Fabro
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|Jurek Noah
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|Annas
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|Group 1
|Joakim
|Cayouette
|s193978
|Revised
|[[Forecasting and estimation techniques]]
|-
|-
|Group 30
|Amalie
|Pedersen
|s193967
|New
|[[Satisficing]]
|-
|-
|Group 30
|Filip Furbo
|Enevoldsen
|s193967
|New
|[[Optimism bias in teams]]
|-
|-
|Group 23
|Nicolai
|Frausing
|s175034
|New
|[[Benefit Realization Management]]
|-
|-
|Group 4
|Emma
|Egelund
|s171516
|Revised
|[[Network Planning in Project Management]]
|-
|-
|Group 21
|Henrik
|Svensson
|s230245
|New
|[[Participatory Design]]
|-
|-
|Group 11
|Luisa Fernanda
|Salazar Rivera
|s222401
|New
|[[Building Effective Work Breakdown Structures (WBS)]]
|-
|-
|Group 15
|Michele
|Ferrante
|s220282
|New
|[[Safety risk management in construction sites]]
|-
|-
|Group 4
|Helena
|Mladenovski
|s183367
| New
|[[Situational Leadership Theory (SLT)]]
|-
|-
|Group 20
|Rolf
|Wollesen
|s193972
| New
|[[Risk Burn Down Chart]]
|-
|-
|Group 6
|Gianluca
|Santinon
|s222630
|New
|[[The Rolling-Wave planning technique]]
|-
|-
|Group X
|Hanna
|Rakel Bjarnadóttir
|s223414
|New
|[[Strength and weakness of sustainable management]]
|-
|-
|Group 5
|Marta
|Santos
|s226759
|New
|[[Risk Response Plan]]
|-
|-
|Group 16
|Hendrik
|Stegers
|s230258
|New
|[[Communication Theories in Project Management]]
|-
|-
|Group X
|Jiafei
|Xia
|s213084
|New
|[[Employee Loyalty Management]]
|-
|-
|Group 15
|Mathéo
|Torris
|s223233
|New
|[[Risk and Mitigation Plan]]
|-
|-
|Group 8
|Frederik
|Høgdal
|s173876
|New
|[[Levels of uncertainties]]
|-
|-
|Group 30
|Jianan
|Yang
|s230033
|New
|[[Turn conflicts into connections]]
|-
|-
|Group 18
|Ellen Cathrine
|Luke
|s184404
|New & Revised
|[[Project War Rooms: A Visual and Collaborative Approach to Project Management]]
|-
|-
|Group 17
|Canovas Iglesias
|Carla
|s226573
|New
|[[Stage-Gate Project Management Model]]
|-
|-
|Group 2
|Ólafur Þorri
|Sigurjónsson
|s222540
|New
|[Decision tree analysis]]
|-
|-
|Group 11
|Dario
|Fiorica
|s222631
|New
|[[Groups or teams?]]
|-
|-
|Group 10
|Benjamin
|Søndberg
|s184314
|New
|[[Top-down vs ground up estimations]]
|-
|-
|Group 24
|Kristian
|Brandstrup
|s183653
|New
|[[Adaptation and agile]]
|-
|-
|Group 14
|Mads
|Marum
|s222620
|New / Reviced
|[[High performing teams]]
|-
|-
|Group 30
|Jeppe
|Paludan-Müller
|s185048
|New
|[[Feasibility risk assessments of transport projects using Monte Carlo-simulations]]
|-
|-
|Group 5
|Rejath
|Ramachandran
|s226673
|New? / revised?
|[[A modern re-think of Fayolism]]
|-
|-
|Group 29
|Onur
|Osman Mustafa
|s223710
|New
|[[Resource Leveling in Construction Projects]]
|-
|-
|Group 15
|Philip
|Wiehe Larsen
|s154259
|New
|[[Situational mapping]]
|-
|-
|Group 9
|Michael
|Vinther
|s163490
|New
|[[Transformational Leadership]]
|-
|-
|Group 21
|Alberto
|Pillon
|s222629
|New
|[[Leveraging Retrospective Meetings for Continuous Improvement in Project Management]]
|-
|-
|Group 2
|Unnar Óli
|Arnarsson
|s222543
|New
|[[The Role of Due Diligence in Project Management]]
|-
|-
|Group 9
|Mateusz
|Szaryk
|s213423
|New
|[[Incentive contract]]
|-
|-
|Group 23
|Mariely
|Sousa
|s230555
|New
|[[Return on Investment (ROI)]]
|-
|-
|Group 31
|Vinay Kumar
|Meena
|s230019
|New
|[[The implication of ethics in project management]]
|-
|-
|Group 10
|Niels Peter
|Lindegaard
|s194473
|New
|[[Risk assessment using Failure mode and effects analysis]]
|-
|-
|Group 6
|Nils Hendrik
|Lange
|s223634
|New
|[[Eisenhower Decision Matrix in Project, Program and Portfolio Management]]
|-
|-
|Group 20
|Caroline Hellerung
|Holm
|s175026
|New
|[[Resistance to Change Mapping]]
|-
|-
|Group 24
|Radost
|Deneva
|s230780
|New
|[[Eisenhower decision matrix]]
|-
|-
|Group 4
|Marie
|Hoel
|s193960
|New
|[[The Hawthorne effect in management]]
|-
|-
|Group 4
|Carl Bygum
|Knudsen
|s193995
|New
|[[Assessment of stakeholders (analysis)]]
|-
|-
|Group 14
|Md Huzzatul Islam
|Shuvo
|s222392
|New
|[[Environmental sustainability]]
|-
|-
|Group 23
|Esther Kiara
|Pattipeilohy
|s230264
|New
|[[The Active Listening Technique]]
|-
|-

Articles Spring Term 2023

2023-02-12T20:15:06Z

Mariely:

=Overview of 2023 Wiki Collections=

{| class="wikitable sortable"
|+Spring Term 2023 Wiki Collections
|Group 23
|Foteini
|Pange
|s222872
|New? / revised?
|[[Stakeholder and Social Network Analysis]]
|-
|-
|Group 14
|Ali
|Abdul-Ghani
|s184640
|New
|[[Value canvas]]
|-
|-
|Group 19
|Fritzdorf
|Julia
|s226721
|New
|[[Perception filters for learning and communicating]]
|-

|-
|Group 14
|Fatima
|Sheraz
|s220010
|New
|[[Innovation Management]]
|-

|-
|Group 23
|Papadaki Fanioudaki
|Maria
|s230214
|New? / revised?
|[[Cost build up estimation in projects]]
|-
|-
|Group 20
|Manuela
|Vazquez
|s222648
|New
|[[WBS - Work Breakdown Structure]]
|-
|-
|Group 23
|Michalis
|Pianos
|s220253
|New? / revised?
|[[Change requests in Project Management]]
|-
|-
|Group 24
|Josefine
|Rolver
|s183652
|New
|[[Managing stakeholders through persona]]
|-
|-
|Group 17
|Sofie
|Heide-Ottosen
|s193943
|New
|[[Groups vs teams]]
|-
|-
|Group 19
|Nikolaos
|Kavros
|s213235
|New? / revised?
|[[Project Analytics]]
|-
|-
|Group
|Kristoffer
|Skjøde Rander
|s175027
|New? / revised?
|[[Strategic Misrepresentation]]
|-
|-
|Group 9
|Aleksander
|Moczko
|s214147
|New
|[[Satisficing]]
|-
|-
|Group name
|Anna
|Diedrichsen
|s193956
|New? / revised?
|[[Conflict resolution through MBTI]]
|-
|-
|Group 24
|Martin
|Sørensen
|s183676
|New
|[[Matrix organizations]]
|-
|-
|Group name
|Mohamed
|Anshur
|s185115
|New
|[[Project Success - How do you attain it?]]
|-
|-
|Group name
|Pablo Andres
|Gomez
|s223631
|New? / revised?
|[[Net Present Value (NPV) - Discounted cash flow]]
|-
|-
|Group 20
|Helena Søndberg
|Svendsen
|s223135
|New
|[[Concurrent Engineering]]
|-
|-
|Group 21
|Johannes Nicolás
|Wildfeuer
|s213244
|New
|[[When – the scientific secrets of perfect timing]]
|-
|-
|Group 29
|Sunneva
|Gaardlykke
|s163822
|New
|[[Eisenhower Decision Matrix]]
|-
|-
|Group 21
|Nicolas
|Stephan
|S226693
|New
|[[Diversity]]
|-
|-
|Group 21
|Ingo
|Baur
|S226768
|New
|[[Self-Awareness!]]
|-
|-
|Group 9
|Mikkel
|Bjerregaard
|S184965
|New? / revised?
|[[The HEXACO Model of Personality Structure]]
|-
|-
|Group 11
|Anton
|Reiling
|s222572
|New
|[[Data-Driven Decision-Making under Uncertainty]]
|-
|-
|Group 9
|Mathias
|Iversen
|S174750
|revised
|[[EQ and Leadership Effectiveness]]
|-
|-
|Group X
|Marcus
|Christiansen
|s194506
|New? / revised?
|[[Project organization]]
|-
|-
|Group 29
|Paraskevi
|Keramari
|s230249
|New? / revised?
|[[Hawthorne studies]]
|-
|-
|Group X
|Christian
|Honoré
|s175077
|New? / revised?
|[[Circular Economy in Project Management]]
|-
|-
|Group 12
|Mansoor
|Samadi
|s174669
|New
|[[MCDM-APH method in decision making]]
|-
|-
|Group X
|Sebastian Christian Harhoff
|Pieters
|s184149
|New? / revised?
|[[FMEA]]
|-
|-
|Group 12
|Lillian
|Nygaard
|S174726
|New? / revised?
|[[The Stage Gate process: A powerful method used for efficient project management]]
|-
|-
|Group name
|Lukas
|Bonitz
|s230263
|New? / revised?
|[[(WBS) - Work Breakdown Structure]]
|-
|-
|Group 31
|Francesco
|Magnani
|s230227
|New? / revised?
|[[Boosting Team Engagement through Gamification: Mitigating the Effects of Social Loafing]]
|-
|-
|Group name
|Gaia
|Sassone
|s222532
|New? / revised?
|[[Applying the Pareto Principle in Risk Management]]
|-
|-
|Group 22
|Ísabella Rós
|Ingimundardóttir
|s222538
|New? / revised?
|[[Personality Types and Leadership]]
|-
|-
|Group TBD
|Sasha
|Mantel
|s222742
|New
|[[Project Stakeholder Management]]
|-
|-
|Group 23
|Julie
|Hustoft
|s194359
|New
|[[The Benefits of Self-Awareness]]
|-
|-
|Group TBD
|Mikkel
|Anderson
|s184230
|New? / revised?
|[[Continuous Integration/Continuous Delivery (CI/CD)]]
|-
|-
|Group 12
|Emma
|Bigum
|s160048
|New
|[[Lippitt-Knoster Complex Change Management]]
|-
|-
|Group 22
|Ingibjörg
|Einarsdóttir
|s223228
|New? / revised?
|[[Mediating conflicts and controversy]]
|-
|-
|Group 4
|Peter
|Aggerholm
|s170890
|New? / revised?
|[[When: The Scientific Secrets of Perfect Timing]]
|-
|-
|Group 36
|Hekla Mist
|Valgeirsdóttir
|s223229
|New? / revised?
|[[Management and leadership differences]]
|-
|-
|Group 20
|Theis Rosenkvist
|Sørensen
|s195768
|New? / revised?
|[[Managing threats and opportunities in risk treatment]]
|-
|-
|Group 9
|Julie Amanda
|Busch
|s190974
|New
|[[Utilizing Value Functions for Evaluating the Performance of Project Alternatives]]
|-
|-
|Group 6
|Martin
|Fehst
|s222575
|New? / revised?
|[[Leading multidisciplinary Project Teams]]
|-
|-
|Group 11
|Eric Vincent
|Vong
|s222594
|New
|[[PDCA cycle]]
|-
|-
|Group 23
|Efthymios
|Samaras
|s223292
|New? / revised?
|[[Benefit Cost Ratio (BCR)]]
|-
|-
|Group 1
|Cirkeline
|Bräuner
|s193974
|Revised
|[[Lessons learned]]
|-
|-
|Group 2
|Hrannar
|Þórarinsson
|s222536
|New
|[[Balanced scorecard: connecting the performance measures]]
|-
|-
|Group 15
|Mar
|Rivera Hedo
|s222520
|New? / revised?
|[[The Importance of Psychological Safety in Team Development]]
|-
|-
|Group 36
|Thordis
|Ragnarsdottir
|s222535
|New? / revised?
|[[Sources of conflicts]]
|-
|-
|Group 5
|Oriol
|Solans Ormo
|s222527
|New? / revised?
|[[Sustainability Issue]]
|-
|-
|Group 15
|Naïl
|Mulatier
|s222590
|New
|[[Addressing diversity and inclusion in a short-term project]]

|-
|-
|Group 22
|Valdís
|Sigurdardóttir
|s2223305
|New
|[[Challenges and opportunities regarding diversity within teams work]]
|-
|-
|Group 12
|Sophia
|Fjeldsøe
|s184141
|New
|[[Stakeholder Mapping]]

|-
|-
|Group 29
|Miriam
|Khader
|s194717
|New
|[[Leadership development through MBTI]]
|-
|-
|Group 5
|Maria
|Arrillaga Tarazona
|s222708
|New? / revised?
|[[Program Evaluation and Review Technique (PERT)]]

|-
|-
|Group 24
|Josefine
|Steinfurth
|s183648
|New
|[[Project based organisations]]

|-
|-
|Group 5
|Patricio Alejandro
|Fabro
|s220269
|New
|[[Metrics in Portfolio management]]

|-
|-
|Group 10
|Jurek Noah
|von Petersdorff-Campen
|s222570
|New
|[[Competency Mapping for Project Management]]

|-
|-
|Group 15
|Inke
|Lindberg
|s223191
|New
|[[Post-occupancy evaluation (POE)]]
|-
|-
|Group 16
|Ahmet
|Ibre
|s222442
|New
|[[Social loafing in multidisciplinary teams]]

|-
|-
|Group 16
|Marie-Therese
|Guidje
|s180863
|New? / revised?
|[[Sustainable Project management]]
|-
|-
|Group 12
|Peter
|Andresen
|s190517
|New
|[[Project performance with Value Stream management]]
|-
|-
|Group 3
|Annas
|Jadi
|s194831
|New/ Revised
|[[Key performance indicators for portfolio management]]
|-
|-
|Group X
|Fabio
|Colombo
|s212492
|New/ Revised
|[[Robust Decision Making: better decisions under uncertainty]]
|-
|-
|Group 20
|Rune
|Knudsen
|s193983
|New
|[[Pooled, Sequential & Reciprocal dependence]]
|-
|-
|Group 24
|Mia
|Hemmingsen
|s183639
|New/ Revised
|[[Seven stages of change]]
|-
|-
|Group 1
|Christina
|Kjær
|s183504
|New/ Revised
|[[The 6C Model]]
|-
|-
|Group 21
|Jakob
|Berling
|s230256
|New
|[[Stress]]
|-
|-
|Group 1
|Joakim
|Cayouette
|s193978
|Revised
|[[Forecasting and estimation techniques]]
|-
|-
|Group 30
|Amalie
|Pedersen
|s193967
|New
|[[Satisficing]]
|-
|-
|Group 30
|Filip Furbo
|Enevoldsen
|s193967
|New
|[[Optimism bias in teams]]
|-
|-
|Group 23
|Nicolai
|Frausing
|s175034
|New
|[[Benefit Realization Management]]
|-
|-
|Group
|Emma
|Egelund
|s171516
|Revised
|[[Network Planning in Project Management]]
|-
|-
|Group 21
|Henrik
|Svensson
|s230245
|New
|[[Participatory Design]]
|-
|-
|Group 11
|Luisa Fernanda
|Salazar Rivera
|s222401
|New
|[[Building Effective Work Breakdown Structures (WBS)]]
|-
|-
|Group 15
|Michele
|Ferrante
|s220282
|New
|[[Safety risk management in construction sites]]
|-
|-
|Group 4
|Helena
|Mladenovski
|s183367
| New
|[[Situational Leadership Theory (SLT)]]
|-
|-
|Group 20
|Rolf
|Wollesen
|s193972
| New
|[[Risk Burn Down Chart]]
|-
|-
|Group 6
|Gianluca
|Santinon
|s222630
|New
|[[The Rolling-Wave planning technique]]
|-
|-
|Group X
|Hanna
|Rakel Bjarnadóttir
|s223414
|New
|[[Strength and weakness of sustainable management]]
|-
|-
|Group 5
|Marta
|Santos
|s226759
|New
|[[Risk Response Plan]]
|-
|-
|Group 16
|Hendrik
|Stegers
|s230258
|New
|[[Communication Theories in Project Management]]
|-
|-
|Group X
|Jiafei
|Xia
|s213084
|New
|[[Employee Loyalty Management]]
|-
|-
|Group 15
|Mathéo
|Torris
|s223233
|New
|[[Risk and Mitigation Plan]]
|-
|-
|Group 8
|Frederik
|Høgdal
|s173876
|New
|[[Levels of uncertainties]]
|-
|-
|Group 30
|Jianan
|Yang
|s230033
|New
|[[Turn conflicts into connections]]
|-
|-
|Group 18
|Ellen Cathrine
|Luke
|s184404
|New & Revised
|[[Project War Rooms: A Visual and Collaborative Approach to Project Management]]
|-
|-
|Group 17
|Canovas Iglesias
|Carla
|s226573
|New
|[[Stage-Gate Project Management Model]]
|-
|-
|Group 2
|Ólafur Þorri
|Sigurjónsson
|s222540
|New
|[Decision tree analysis]]
|-
|-
|Group 11
|Dario
|Fiorica
|s222631
|New
|[[Groups or teams?]]
|-
|-
|Group 10
|Benjamin
|Søndberg
|s184314
|New
|[[Top-down vs ground up estimations]]
|-
|-
|Group 24
|Kristian
|Brandstrup
|s183653
|New
|[[Adaptation and agile]]
|New
|[[Groups or teams?]]
|-
|-
|Group 14
|Mads
|Marum
|s222620
|New / Reviced
|[[High performing teams]]
|-
|-
|Group 30
|Jeppe
|Paludan-Müller
|s185048
|New
|[[Feasibility risk assessments of transport projects using Monte Carlo-simulations]]
|-
|-
|Group 5
|Rejath
|Ramachandran
|s226673
|New? / revised?
|[[A modern re-think of Fayolism]]
|-
|-
|Group 29
|Onur
|Osman Mustafa
|s223710
|New
|[[Resource Leveling in Construction Projects]]
|-
|-
|Group 15
|Philip
|Wiehe Larsen
|s154259
|New
|[[Situational mapping]]
|-
|-
|Group 9
|Michael
|Vinther
|s163490
|New
|[[Transformational Leadership]]
|-
|-
|Group 21
|Alberto
|Pillon
|s222629
|New
|[[Leveraging Retrospective Meetings for Continuous Improvement in Project Management]]
|-
|-
|Group 2
|Unnar Óli
|Arnarsson
|s222543
|New
|[[The Role of Due Diligence in Project Management]]
|-
|-
|Group 9
|Mateusz
|Szaryk
|s213423
|New
|[[Incentive contract]]
|-
|-
|Group 23
|Mariely
|Sousa
|s230555
|New
|[[Return on Investment (ROI)]]

Return on Investment (ROI)

2023-02-12T20:14:50Z

Mariely: Created page with "=Abstract= The Return on Investment, widely referred to as simply ROI, is a crucial financial tool in Project, Portfolio, and Program Management. It provides valuable insight..."