Hello, this is Raul again with lesson number three, what is ROI? So what exactly is this buzzword return on investment ROI Put simply, it is a measure of what you get for what you put in. Suppose you invest $1,000 in the bank that promises you 1020 at the end of one year and an alarm clock simply for opening an account with the bank, you check online and see that the value of the clock is $15. Your total return would then be 20 plus 1535. On a $1,000 investment, a 3.5% return it is clear that there are essentially two quarters which determine your ROI, what you put in all the cost. And then what you get for what you put in, or the return.
Dividing the return by the cost gives you the rate of return. Common sense tells us that to increase the ROI, one must somehow lower the cost or increase the return or do both. Returning to the bank example, if a second bank say bank B offered you the same deal for an investment of only 750, your gut would tell you to choose this back, all other things being equal. And you would be mathematically right because this bank return would be $35 on a 750 investment of 4.66% ROI. If another bank, say bank see offered you a deal of $30 plus an alarm clock, but for $1,000 investment, the return compared to the first bank would be $45 or a 4.5% return but you would still be lower than that of bank B's, but bank C's return would still be lower than that of bank B's. Let's summarize by comparing our various returns.
Here's the investment the denominator, this is the cash value of the return. Note that we also have to account for the cash value of the alarm clock. So now we can calculate the return totals. Finally, we calculate the ROI using our simple formula. Bank B is clearly number one, followed by bank C, and then Bank A. So to calculate ROI, you must account for all costs and all returns and then divided terms by costs.
It is now easy to extend this definition to college. because our goal is to have a high ROI it makes sense to lower the denominator. That is lower the costs of college attendance. A lower starting cost results in lower borrowed amounts and a quicker playback of loans, resulting in higher ROI. There are so many costs associated with going to college. We will discuss each one of these in upcoming lessons.
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