# ROI, NPV and Payback — AI Strategy, Ethics and Governance

Source: https://www.geekswithgeeks.com/en/ai-strategy-governance/biz-roi

> Estimate the return on an AI investment honestly, including running costs and uncertainty.

## Count the whole cost

Benefits (time saved, errors avoided, revenue gained) must be set against **all** costs: building and integration, model usage, infrastructure, monitoring, evaluation, training users, legal review and ongoing maintenance. **Payback period** is how long until cumulative net benefit covers the upfront cost. **NPV** (net present value) discounts future money because a rupee next year is worth less than a rupee today. Be conservative with benefits, show a range (pessimistic, expected, optimistic) and state your assumptions so others can challenge them.

## Costs, benefits, ownership

A funded AI project needs a believable business case and a clear owner, team and way of working.

![Four parts: case, choice, team, change.](assets/figures/ai-strategy-governance/section-2-map.svg) — Figure 2.1 — Case, choice, team and change.

## NPV and payback, run

I ran this with illustrative figures in rupees: build 1,000,000, run cost 300,000 a year, benefit 900,000 a year, 10% discount rate, 3 years. NPV is about 492,111 and payback takes 20 months.

```python
def roi(build, run_per_year, benefit_per_year, years=3, rate=0.10):
    flows = [-build] + [benefit_per_year - run_per_year] * years
    npv = sum(f / (1 + rate) ** i for i, f in enumerate(flows))
    payback_months = build / ((benefit_per_year - run_per_year) / 12)
    return round(npv), round(payback_months, 1)

print(roi(build=1_000_000, run_per_year=300_000, benefit_per_year=900_000))
```

Output:

```
(492111, 20.0)
```

## Stress-test the benefit

Re-run the model with the benefit cut by 30% and the cost raised by 30%. If the project only works under the optimistic numbers, it is fragile.

**Quiz:** What does payback period measure?

- [ ] How fast the model replies
- [x] How long until net benefits cover the upfront cost
- [ ] The number of users
- [ ] The size of the dataset

*Answer:* How long until net benefits cover the upfront cost. It is the time to recover the initial investment from ongoing net savings.