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Originally Posted by BCOURTNEY
I was having what I thought was a pretty strange discussion with someone today. I then realized they live in an alternate universe from mine.
This is the right formula: ROI = (revenue – cost) / (cost)
This is the wrong formula: ROI = (revenue) / (cost)
No, I really don't think this is subjective.
e.g. a 15/1 odds horse pays $32.00.
The ROI for the investment is = ((32-2)/2) = 1500% (15:1)
The ROI for the investment is not (32/2) = 1600% (16:1)
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The first method is the one I was taught in high school bookkeeping class. It's also the one in used in every book I've ever read on investing.
The second method seems to be popular in handicapping books. Both are valid provided that everyone is using the same formula and understands the formula.
