What is the first step in calculating return on investment (ROI)?

Calculating the return on investment (ROI) begins with determining the present value of future cash flows generated by an investment. This is crucial because ROI is about assessing the profitability of an investment relative to its cost, and understanding the time value of money is essential in this process. The present value helps in converting future earnings into today's dollars, allowing for a more accurate comparison between the cost of the investment and the income it will generate over time.

By starting with the present value, you gain insight into how much your future cash flows are worth today. This step sets the foundation for further calculations, such as evaluating the net benefits from the investment, which can then be juxtaposed with the total expenditure to arrive at the final ROI figure. Each subsequent calculation relies on this initial understanding of present value, underscoring its importance in the ROI analysis process.