ROI, Payback Period, and Depreciation: How to Evaluate a Business Investment

Deciding whether a new piece of equipment, a marketing campaign, or a business investment was actually worth it usually comes down to three related but distinct numbers — and each one answers a slightly different question.

Return on Investment (ROI)

ROI measures how much profit an investment generated relative to what it cost.
Formula: ROI % = (Net Profit / Cost of Investment) × 100

Example: Spending ₹50,000 on new equipment that generates ₹65,000 in additional profit gives an ROI of (15,000 / 50,000) × 100 = 30%. ROI is useful for comparing the overall efficiency of different investments, but on its own it says nothing about how long it took to earn that return — a 30% ROI over one year is very different from a 30% ROI spread across five.

Annualized ROI

Because plain ROI ignores time, annualized ROI adjusts the figure to a per-year basis, which makes it possible to fairly compare a one-year investment against a five-year one. A 30% ROI earned over five years is a much more modest annualized return than the same 30% earned in a single year, even though the raw ROI percentage looks identical.

Payback period

Payback period answers a different, more cash-flow-focused question: how long until the investment pays for itself?
Formula: Payback Period = Initial Investment / Monthly (or Annual) Cash Inflow

Example: A ₹50,000 investment that generates ₹5,000 in additional monthly profit has a payback period of 50,000 / 5,000 = 10 months. Payback period doesn't account for profit earned after the break-even point, which is exactly why it's usually paired with ROI rather than used alone — a short payback period with low total ROI, and a longer payback period with high total ROI, can both be reasonable choices depending on how much risk and cash-flow flexibility a business can absorb.

Depreciation

Depreciation isn't about profitability at all — it's an accounting method for spreading the cost of a physical asset (equipment, vehicles, machinery) over its useful life, rather than recording the entire cost as an expense in the year it was purchased.
Formula (straight-line method): Annual Depreciation = (Asset Cost − Salvage Value) / Useful Life in Years

Example: A ₹200,000 machine with an estimated ₹20,000 salvage value and a 10-year useful life depreciates by (200,000 − 20,000) / 10 = ₹18,000 per year. This matters for ROI too — the depreciation expense reduces reported profit each year, so an accurate ROI calculation on a capital asset should account for it rather than just comparing raw cash in versus cash out.

Using all three together

A capital purchase decision benefits from looking at all three angles: ROI tells you whether the investment is profitable overall, payback period tells you how long your cash is tied up before you see a net gain, and depreciation tells you how the asset's cost gets recognized on the books over time — which affects both your tax liability and how profitable the investment looks on paper in its early years.

Calculate each one

Use the ROI Calculator to work out ROI and annualized ROI from an investment's cost and final value, the Payback Period Calculator to see how long an investment takes to recover from monthly returns, and the Straight-Line Depreciation Calculator for a full year-by-year depreciation schedule on a physical asset.