Put $20,000 in, get $26,000 back after three years, and your return is 30%, or 9.14% a year. Enter your own amounts and holding period, then add yearly cash flow to see a payback time.
Why does one investment get two return numbers?
Because they answer different questions. Return on investment is the total gain divided by the amount invested. It tells you how much you made, not how fast you made it, and a big number over a long stretch can look better than it is. The yearly figure spreads that gain over the years held, with compounding, and that’s what lets you compare a three-year project with a ten-year one.
The payback period is a third idea: how long until you’ve got your money back. It divides the amount invested by the cash you receive each year, and it appears only when you fill in the yearly cash field.
How does holding time change the yearly return?
The table keeps $20,000 growing to $26,000 and changes only the years held. The total return stays at 30%.
| Years held | Total return | Return per year |
|---|---|---|
| 1 | 30.0% | 30.00% |
| 2 | 30.0% | 14.02% |
| 3 | 30.0% | 9.14% |
| 5 | 30.0% | 5.39% |
| 10 | 30.0% | 2.66% |
What does a $20,000 investment look like in practice?
You invest $20,000 and it grows to $26,000 after three years. The gain is $6,000, the return on investment is 30.0%, and the compound return is 9.14% a year. Hold it for six years instead and the same result drops to 4.47% a year.
Say the money also returns $4,000 in cash each year. The payback period is then 5.0 years, meaning five years of that cash covers the original $20,000. If you receive any income along the way, add it to the value at the end, as the field hint says. Leave it out and the return will be understated.
Where does ROI mislead?
A high total return over a long stretch can hide a weak yearly return, so look at both numbers before comparing two options. And remember the result covers one lump sum. It doesn’t track deposits made in between, so it suits a single purchase better than a monthly savings plan.
Taxes and fees are left out. Past results don’t predict future ones. If the value at the end is below the amount invested, the return is negative and the yearly figure follows. Payback ignores what happens once the money is recovered.
That’s a real gap.
How do you compare two options fairly?
Rank them by the yearly return, not the total. A 50% gain after five years sounds better than 30% after three, but it works out to 8.45% a year against 9.14%. Run both through the calculator and compare the compound figure.
Use the same amount for each option, add every payment you received, and be honest about the years. A shorter holding period flatters the yearly result, so ask yourself if you could repeat that gain at the same rate. Often you can’t.
Where the numbers come from
Return on investment is the gain divided by the amount invested. The yearly return is the end value divided by the amount invested, raised to one over the years held, minus one. Everything comes from your inputs, with no outside data. The site has no link with any government or investment firm.
For a rental property, the cap rate calculator and the cash on cash return calculator apply the same idea. The compound interest calculator looks forward and projects growth, instead of looking back. To check what a business earns per sale, use the profit margin calculator.
Frequently asked questions
How is ROI worked out?
Divide the gain by the amount invested. $6,000 on $20,000 is 30%.
What is the yearly return?
The compound rate that turns the amount invested into the end value over the years held. Three years gives 9.14%.
How is the payback period found?
Divide the amount invested by the yearly cash you get back. $20,000 and $4,000 a year gives 5.0 years.
Should I include income?
Yes. Add any income you received to the value at the end, or the return will come out too low.
Does it include tax and fees?
No. Taxes and fees are left out, and past results don't predict future ones.
Sources and updates
Updated: . How we check rates · Editorial team · Updates
Estimate only. These figures are a planning estimate, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns, and we don't offer tax, legal or accounting services. We have no connection with the Canada Revenue Agency, Revenu Québec or any provincial government. Your real amounts depend on details this tool cannot see, so confirm them with an official source or a qualified professional before you act.