In the ROI example, what is the monthly profit used to compute ROI?

In the ROI example, what is the monthly profit used to compute ROI?

• A. -20,000
• B. -40,000
• C. -60,000
• D. -80,000

Answer: (B)

The main idea is that ROI uses net profit (or loss) relative to the investment. In the example, the monthly profit used is a loss of $40,000. That figure becomes the numerator in the ROI calculation for each month, so it directly determines whether ROI is positive or negative. Since it’s a negative amount, the ROI will be negative, signaling that the project reduces value each month. If you annualize, you’d take that monthly figure (-$40,000) and multiply by 12 to get a yearly net profit of -$480,000, and then divide by the initial investment to get the yearly ROI. The other values would imply larger or smaller monthly losses (or profits) and would produce different ROI results, but the scenario specified uses -$40,000.

The main idea is that ROI uses net profit (or loss) relative to the investment. In the example, the monthly profit used is a loss of $40,000. That figure becomes the numerator in the ROI calculation for each month, so it directly determines whether ROI is positive or negative. Since it’s a negative amount, the ROI will be negative, signaling that the project reduces value each month. If you annualize, you’d take that monthly figure (-$40,000) and multiply by 12 to get a yearly net profit of -$480,000, and then divide by the initial investment to get the yearly ROI. The other values would imply larger or smaller monthly losses (or profits) and would produce different ROI results, but the scenario specified uses -$40,000.