Investment Decision Sheet

The arithmetic

NET MONTHLY

monthly return − monthly running cost

PAYBACK

investment ÷ net monthly

ROI

(net monthly x months − investment) ÷ investment

Annualised

ROI ÷ (months ÷ 12)

Months in profit

horizon − payback

PAYBACK measures

RISK — how long your money is exposed

ROI measures

RETURN — whether the wait was worth it

⚠ Neither discounts

for a long project use NPV or IRR

⚠ ROI without a period

is close to meaningless

Options compared

This decision

Project

Date

Up-front cost

Monthly return

Monthly running cost

NET MONTHLY

Expected life

PAYBACK

MONTHS IN PROFIT

ROI over the period

Annualised

Pessimistic return figure

Payback if pessimistic

Decision

Before committing

• Ongoing running cost included, not just the up-front price
• Someone's TIME counted as a running cost
• Horizon set honestly — how long will this really keep working?
• Both figures read, not just the flattering one
• Run a second time with a pessimistic return
• Checked whether the decision survives being wrong by a third
• For long projects, NPV or IRR used instead
• Cash position checked against the payback, separately from the ROI
• Anything material discussed with an adviser or accountant

Two measures, two blind spots

Payback stops looking the moment the money is back, so two projects with the same payback score identically even if one runs ten times longer. ROI never looks at timing, so the same percentage means something completely different over two years and twenty. Use payback to ask whether you can afford the wait, and ROI to ask whether the wait is worth it.

Run it pessimistically

Every output follows from the monthly return you entered, and that figure is an estimate — usually made by someone who would like the project approved. The interesting question is not what happens if the estimate is right; it is whether the decision still holds if it is wrong by a third. That takes thirty seconds and changes more minds than any single result.