Difference Between NPV and ROI

Financial metrics are used to calculate and see the result of the investments or the cash flow for different types of institutions. Some of them are more commonly used than others. The choice depends on what the owner wants to get information on.

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Finance Quiz

Test your knowledge about topics related to finance

1 / 10

What is a bull market?

A market with decreasing stock prices and pessimistic investor sentiment

A market with increasing stock prices and optimistic investor sentiment

A market with no change in stock prices and neutral investor sentiment

A market with high stock prices and low investor sentiment

2 / 10

What is the difference between debt and equity?

Debt represents ownership in a company, equity represents borrowed money.

Debt represents borrowed money, equity represents ownership in a company.

Debt is high risk, equity is low risk.

Debt is guaranteed, equity is not guaranteed.

3 / 10

What is a portfolio in finance?

A collection of stocks

A collection of bonds

A collection of investments

A collection of real estate properties

4 / 10

What is the full form of "EPS"?

Earnings per share

Exchange per Share

Equity Private Selling

Earning Preferred Stock

5 / 10

What is a mutual fund?

A type of stock

A savings account

A pool of investment from multiple investors

A type of bond

6 / 10

What is the purpose of financial ratios?

To measure the performance of a company

To determine the value of a company

To compare the performance of different companies

All of the above

7 / 10

What is the yield curve?

A graph that plots the yield of bonds against their maturity date

A graph that plots the yield of stocks against their maturity date

A graph that plots the yield of real estate investments against their maturity date

A graph that plots the yield of savings accounts against their maturity date

8 / 10

What is the difference between a savings account and a checking account?

Savings accounts have a higher interest rate, checking accounts have lower fees

Checking accounts have a higher interest rate, savings accounts have lower fees

Savings accounts are for long-term savings, checking accounts are for everyday spending

Checking accounts are for long-term savings, savings accounts are for everyday spending

9 / 10

An 'Overdraft' is where a business is permitted to overspend on its bank account up to an agreed limit.

True

False

10 / 10

What is a bond yield?

The length of time until a bond matures

The price at which a bond is traded

The amount of return an investor receives on a bond

The credit rating of a bond issuer

Your score is

Both NPV and ROI are terms that are very common and useful in the business and finance world. If one is starting a new company or enterprise, one should be able to distinguish between various terms used in the process of calculating the results of the business.

NPV vs ROI

The difference between NPV and ROI is that both of the metrics are used to calculate different things. NPV presents the user with the present value of a business’s investment, while ROI is used to measure the gained cash flow of the company.

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NPV provides the net present value of the current cash flow of a business. The resulted amount might either come in a positive amount or in a negative one.

If the total comes off negative or unfavorable, then it means a low return. During the calculation, investments are discounted according to the present day.

ROI is a financial measure used to measure the amount of profitability on the amount of invested cash flow. After the calculation, one can differentiate between the profitable investment and the unprofitable investment.

There are a few ways on how the metric can be calculated, and it depends on the requirement of the company.

Comparison Table

Parameters of Comparison	NPV	ROI
Extension	Net Present Value	Return On Investment
Definition	NPV is a metric that examines the cash inflows and cash outflows of a business.	ROI is a financial measure that gives the ratio of net income and investment.
Formula	NPV= Cash flow / (1 + i)t – initial investment	ROI= (Total benefits – total costs) / total costs
Another name	Net present worth (NPW)	Return on invested capital
Advantages	Help in the planning of the business decision, regards to the time value of money, etc.	Indicates the position of investments as well as helps in the comparison of different investments, etc.
Disadvantages	The amount may not be totally accurate as it doesn’t add the hidden cost, etc.	The result is of a return cannot be done for a shorter amount of time period, etc.

What is NPV?

NPV means Net Present Value. It is a financial measure used to calculate the difference between cash inflows and the cash outflows that are presently invested in the business. It basically tells how profitable a project or an investment is.

It helps the management or the owners to see which investments are fruitful and which are not. The result can come off in three situations. First, where the NPV is positive.

Then, a negative NPV and, lastly, a zero NPV. Mostly, the first two are the common results. Zero NPV means that there is equality between the asset and its worth.

A positive NPV means that the investments are beneficial for the government. It is very common in doing the process of capital budgeting and is done after a certain period of time. The tool is not that complicated as others used for the profitability calculation.

What is ROI?

ROI is a performance measure that is used to see the return on the investment(s) made on the business. Its full form is Return on Investment. The ending result comes in a ratio and percentage that differentiates it from other measures.

It is easier than other calculating metrics and, thus, is one of the most common measures to be used by people. There are many ways to calculate ROI. One way would be: Current Value of investment – Cost of investment) / Cost Of investment.

The end result can come off as high or low. A high ROI is favorable for the business, whereas a low ROI is not considered good. There are a few disadvantages of the metric, though. For example: Sometimes, the outcome cannot be accurate on long-term investments.

Main Differences Between NPV and ROI

They have different meanings. NPV is the amount of the present value of any type of investment in a financial institution, while ROI calculates the return on the capital that is invested.
The result of NPV comes in an absolute number. On the flip side, ROI is a percentage.
Both of the metrics are used to determine different estimations. NPV is used to get the present value of the assets, basically to judge if they are viable or not. ROI, on the other hand, is calculated so that one can measure and compare different investments of the company.
Since NPV is based on the assumptions made for the future, it can affect the result of the end amount in error. While there are fewer errors in the calculation of ROI since it doesn’t depend on estimations of the future.
During the calculation of NVP, the risk is factored in. On the other hand, there is no risk factor involved in ROI. It comes in use after a certain time period if the user wants to use it, otherwise not.
NVP is time-adjusted, while in comparison, ROI is not.

References

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Chara Yadav

Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.