Return on Investment is one of the profitability ratios that measures the gain on investment. It is a ratio of the profit made on any investment to the cost of the investment.
Merits of Roi
- ROI for is simple but effective and universally accepted as a financial ratio.
- Roi helps the investors and the financial professional to quickly check the prospect of an investment and thus saves on time.
- ROI helps in exploring and measuing the potential returns on different investment opportunities.
Problem of Roi
- The calculation of return on investment completely ignores the time value of money.
Merits of residual income.
- RI takes into account the opportunity cost of tying up assets in the division; The minimum rate of return varies depending on the riskiness of the division. Different assets can earn different returns.
Problem in RI
- It is an absolute measure of return and thus it that it does not is difficult to directly compare divisonal performance.
Merits of economic added value.
- EVA takes into consideration all the cost of equity and capital which is normally excluded costs including the cost of equity capital in the normal accounting.
Problem of EVA.
- The problem main of economic value added is the practicability of the calculations.
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