How to Calculate Marginal Return on an Investment

Every penny counts in the world of investment.

Return on investment is a measure used by accountants and investment analysts to determine the investment potential of a particular asset. The calculation compares the cost of the asset with the profit made from the sale of the asset and is usually expressed in percentage terms. Marginal return on investment is used to show the incremental affect of increases or decreases in the profit made from the sale of the asset and is commonly used in scenario analysis.

Step 1

Determine the cost of the investment. Assume you purchase securities valued at $9,800 and the commission on the trade is $200. Therefore, the total cost of the investment is $10,000.

Step 2

Divide the profit made from the sale of the securities by the cost of the investment. For example, if the profit made from the sale is $5,000, the calculation is $5,000 divided by $10,000 -- 50 percent.

Step 3

Determine the marginal return on investment for an additional $1,000 in profit. The calculation is $6,000 ($5,000 + $1,000) divided by $10,000 -- 60 percent. The marginal return on investment for an additional $1,000 in profit is 10 percent (60 percent minus 50 percent).

Step 4

Determine the marginal return on an investment which is $1,000 less in profit. The calculation is $4,000 divided by $10,000 -- 40 percent. This further illustrates that a $1,000 change in profit is equivalent to a 10 percent change in ROI.

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