How to Calculate the Rate of Return on Capital

By Stephen L. Nelson

Calculating the rate of return on a capital investment is a little bit tricky, and you’ll need more than QuickBooks. In almost every case, you need either a financial calculator (a good one) or a spreadsheet program, such as Microsoft Excel.

If you don’t have Excel, you should still be able to read almost all the following discussion and then translate it into the instructions that you need in order to use a financial calculator or some other spreadsheet program. Note that the spreadsheet mechanics described aren’t very difficult.

Calculating a rate of return on a capital expenditure requires three steps:

  1. Calculate the investment amount.

  2. Estimate the net cash flows paid by the investment.

  3. Use a financial calculator (such as one of those fancy Hewlett-Packard calculators) or a spreadsheet program (such as Microsoft Excel) to calculate the rate of return measure.

If you can, use a spreadsheet program rather than go the fancy-calculator route; such calculators can be less than user-friendly. Slightly more than three decades ago, the joke among many young MBAs was that the ability to calculate the rate of return measures on a Hewlett-Packard 12C calculator was worth $40,000 a year. The slogan, in fact, was “40G for a 12C.”