How to Calculate the Rate of Return on Capital

Calculating the rate of return on a capital investment is a little bit tricky, and you'll need more than QuickBooks 2012. 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 use a financial calculator or some other spreadsheet program.

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 either 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 going the fancy-calculator route — such calculators can be less than user-friendly. Roughly three decades ago, the joke among many young M.B.A.s 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.”

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