Question 1

How is ROI calculated?

Accepted Answer

ROI = (Final Value − Initial Investment) / Initial Investment × 100. For example, if you invest €10,000 and it grows to €13,000, your ROI is (13,000 − 10,000) / 10,000 × 100 = 30%.

Question 2

What is CAGR?

Accepted Answer

CAGR (Compound Annual Growth Rate) is the annualized ROI, accounting for compounding. It answers: 'what consistent annual return would produce this result?' Formula: CAGR = (Final Value / Initial Investment)^(1/years) − 1.

Question 3

What is a good ROI?

Accepted Answer

A 'good' ROI depends on context and risk. The S&P 500 has historically returned ~10% nominal (~7% real) annually. Real estate typically returns 6-8% nominal. Savings accounts return 2-5%. Higher ROI usually means higher risk.

Question 4

What is payback period?

Accepted Answer

Payback period is the time it takes to double your investment at the given annualized return rate (based on the Rule of 72: years ≈ 72 / annual return%). For example, at 7% annualized return, your investment doubles in ~10.3 years.

Question 5

How do I compare investments with different time periods?

Accepted Answer

Always use annualized ROI (CAGR) when comparing investments held for different periods. A 100% total return over 20 years is only 3.5% CAGR — much less than a 50% return over 5 years (8.5% CAGR).

Question 6

Does ROI include dividends?

Accepted Answer

Total return ROI includes both capital appreciation and dividends/income. When calculating, include all cash flows: your final value should include any dividends received. Total return is the most complete measure of investment performance.

Question 7

What is the difference between ROI and IRR?

Accepted Answer

ROI is a simple ratio for a single investment period. IRR (Internal Rate of Return) handles multiple cash flows at different times — useful for projects with ongoing investments or varying payouts. For simple buy-and-hold investments, ROI/CAGR is sufficient.

Question 8

How do I account for taxes when calculating ROI?

Accepted Answer

For after-tax ROI, use your net proceeds after capital gains tax instead of the gross final value. In Spain, capital gains tax rates range from 19% (up to €6,000) to 28% (over €300,000). Always factor in taxes for an accurate picture.

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Understanding return on investment

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