How to Calculate ROI Using Operating Income & Fair Market Value
Original post by Amanda Webster of Demand Media
Return on investment, or ROI, is a percentage that is calculated to help let managers or investors know if a project or investment is attractive. In some instances, you may wish to calculate ROI using operating income or the fair market value of an investment. For example, if you are a property manager, you may wish to calculate ROI using operating income when determining the appropriate amount of rent to charge renters.
Analyze your operating income. Operating income, sometimes also referred to as earnings before income and taxes (EBIT) is calculated using the following equation: Operating income = revenues - cash costs - depreciation expense. In other words, to determine your operating income, you must subtract cash costs and depreciation expenses from revenues.
Determine the percent of return on investment. Calculate this percentage using the following equation: net operating income (see the steps above) × 100 = percent return on your investment. In other words, to calculate a percentage for return on investment, you must multiply your net operating income, obtained in step one, by 100.
Calculate return on investment using operating income. Perform this function using the following equation: percent return on investment ÷ purchase price of investment = ROI. In other words, return on investment in this case is determined by dividing the percent return on investment from step two by the purchase price of the investment.
Fair Market Value
Determine the fair market value of the asset in question. According to Generally Accepted Accounting Principles (GAAP) the fair market value of an asset is the amount at which an asset might be purchased or sold at current market prices.
Identify the amount of return that you would use in the basic return on investment equation. Return is the amount of money gained or lost since the original purchase of the asset.
Substitute the fair market value of the asset for capital in the basic ROI equation. Basic ROI, or rate of return, is typically calculated using the formula, ((Return - Capital) / Capital) × 100% = Rate of Return. You might choose to calculate ROI using fair market value in place of the original purchase price to determine the value of an asset today as opposed to its historical value.
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About the Author
Amanda Webster has a Bachelor of Science in business administration and a Master of Science in management. She is currently pursuing a Master of Arts in English with a concentration in writing and has been working as a freelance writer since 2008. Webster is also editor-in-chief of the Mount Mary College newspaper, "Arches."
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