How to Calculate Return on Net Investment
Investors have many different options available on how and where to invest money. Each investment has its own associated costs and fees, and that is a factor in the net return on investments. Investors can calculate the net return on investment using a simple formula that factors annual fees, commissions, and loads. Investors can take the net return one step further and calculate net after-tax return for an accurate number, based on individual parameters.
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Instructions
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Write down the formula for Return on Investment: ROI = (Proceeds from Investment - Cost of Investment)/ Cost of Investment.
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Assume you paid $5,000 for XYZ stock shares, plus $125 in commissions ($5,125 cost). You sold XYZ two years later for $7,000 with $175 in commissions (7,175 proceeds). This example assumes the maximum 2.5 percent commission allowed by the IU.S. Securities Exchange Commission on stock purchases and sales.
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Fill in the variables: ROI = (7,175 - 5,125)/ 5,125.
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Calculate: ROI = .40. Your net return on investment is 40 percent.
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Factor your tax rate for the transaction by contacting your tax adviser regarding your short- or long-term gains rate. Assume this transaction has a 35 percent tax consequence. Therefore multiply the 40 percent net return by 35 percent: (40 percent X 35 percent= .14), which means your 40 percent net return is reduced by 12 percent--leaving you with a net after-tax return of 28 percent.
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Tips & Warnings
Consult the IRS or a tax adviser regarding current-year tax rates for short- and long-term investment sales.
