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Thread: Computing ROI ?

  1. #1
    May 2009

    Computing ROI ?

    I have been tasked to compute ROI for/on the addition of a person to a team. My boss has given us numbers to use to compute this. However, I think we are doing it wrong. I try my best to explain. He is looking for how many years will it take to pay for the cost of this person. Here is the example

    A store will loose 100k in inventory at retail, or 50K at cost in a year. The cost of a person to help reduce that loss is 30k. I see this as two questions

    What percent reduction of the loss would the person have to reduce to pay their wage for a year? Or just pick a percent (say 10%) and then figure out how many years it would take to recoup?

    Am i on the right track? also ROI is (income/cost)*100 what is the meaning of the value? is it dollars, time ?

    Many thanks to any and all that may help?
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  2. #2
    MHF Contributor
    Aug 2007
    For starters, "*100" always has struck me as quite silly. income / cost is quite a sufficient measure. It will produce a decimal expression that can be converted to a percentage if desired.

    Second, income / cost is often an inadequate description of the value. The first question in my mind is "When?" Is $10,000 in income this year the same as $10,000 in income 20 years from now? Probably not, but that may be how some manager wants to think of it. If we're only talking about a one-year period, maybe it makes little difference.

    Third, do we care about the retail loss? Is this information just smoke and mirrors?
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