Investors also want to know the expected financial returns—
typically either the return on investment (ROI) or the internal rate of return (IRR).
For an internal project, the financial return should exceed the company's hurdle rate—the minimum rate of return expected of all projects.
For a risky start-up business, investors generally require a higher return to compensate for the higher level of risk of loss.
To calculate the ROI, divide net operating income by total investments.
For example, $45,000/$300,000 = 0.15 or 15% ROI.
The higher the ROI, the more efficient the company is in using its capital to produce a profit.
To calculate an IRR of 50%—the return an investor might expect for a risky investment—use the following formula:
FV = Investment x (1+0.5)n
where FV is future value, investment is the dollar amount of the investment, and n is the number of years to receive the return.
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