How to Measure the Return on Investment (ROI) for Capital Expenditure?
Measuring the ROI for capital expenditure is crucial to ensure that the investments are yielding the expected benefits. Entrepreneurs can use the following methods:
1. Payback Period: Calculate the time it takes for the investment to generate enough cash flow to cover the initial cost. A shorter payback period is generally preferred. 2. Net Present Value (NPV): NPV calculates the present value of the investment’s future cash flows, minus the initial investment cost. A positive NPV indicates a good investment. 3. Internal Rate of Return (IRR): IRR is the discount rate that makes the NPV of the investment zero. A higher IRR indicates a more profitable investment.