Return on Investment
Do a search of �return on investment� in the library and/or the internet and explain and summarize your
findings. In particular, discuss how others define or explain �return on investment.� Based upon your
research, offer an example to compare the value of a college education as compared to future earning
potential. Consider direct and indirect costs. Use the VPMO Return on Investment review (Figure 9-4) on
page 162 of the Gordon & Curlee text. The paper should be 3-5 pages in length and in APA format. Your
paper must include (cite and reference) at least one current peer reviewed article about your selected
topic.
Return on Investment
According to (Rubin & Patel (2017), Return on Investment (ROI) is a measure of
performance that companies use to assess the efficiency of investments as well as comparing the
efficiencies of some different investments of a company. It is essential as it enables companies to
measure the amount of return on investment, comparative to the cost of investments. Different
formulas are used to measure the return on investment. Therefore, the result is articulated as a
ratio or a percentage. The most straightforward formula for calculating the return of investment
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is given by dividing the net gain of investment with the initial cost of investment (Rubin & Patel,
2017). The gain from a business is the proceeds obtained from the sale of investment of interest.
This paper presents different views of researchers concerning return on investment and its
benefits to individuals and business organizations.
Since the return on investment is expressed as a percentage, it allows easy
comparison with gains from other financial investments. This allows companies to gauge a broad
type of investments against others. Therefore, return on investment is a significant performance
metric, which is versatile and simple. Return on investment is used as a simple measure of
investments’ profitability. It has a simple calculation, which is not complicated and is
comparatively easy to interpret. ROI has a range of uses and enables project managers to decide
whether to invest or not to invest a particular project. For instance, if the ROI of investment is
negative, or if additional opportunities associated with the higher return on investments are
available, it indicates that investors can select or eliminate the most profitable alternative. Many
researchers believe that return on investment is not necessarily the same as earnings or profits.
This is because it deals with the revenue that an investor puts in a company and the return
realized on the funds based on the net earnings or profits of investment. This is because profits
measure the performance of the business based on the earnings realized in a given period.
Besides, ROI is very different from the equity of owners, and it is only in sole proprietorship
where equity is equal to the entire investment or business asset (Rubin & Patel, 2017).
The return on investment is used to measure the profitability of a business. This is
because it measures the performance such as company policies of pricing, capital equipment
investment and inventory investments. Managers can use in several ways such as dividing the net
returns, taxes, and interest by total and liabilities to determine the rate of return or profits of total
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employed capital as well dividing net returns and income taxes by the liabilities and proprietary
equity to generate earnings’ rate in invested capital. Besides, “managers can divide net returns by
total capital plus reserves to determine the rate of earnings on stock equity and proprietary equity
(Rubin & Patel, 2017).” Moreover, return in investment is a useful financial metric for assessing
the economic consequences of actions and investments. The determined return on investment is a
percentage or ratio, which compares net gains to net costs. Therefore, ROI is a regular used
financial metric that provides a direct and easy measure of investment profitability.
Just like other metrics of financial cash flows such as payback, an internal rate of
return and NPV, ROI assesses an investment analysis of the streams of cash flows that follow
from specific actions. Therefore, these financial metrics compare the probable income to
probable costs of investment in a distinctive approach. Thus, the return of investment compares
earnings to costs by making a ratio between outflows and inflows that accrue from the
investments. However, analysts usually report their return on investment as a percentage to
represent net investment gain. ROI is an important metric to measure financial performance
because when comparing two or more company investments and their risks and other factors are
similar, investment with the highest return on investment is always the preferred choice (Rubin
& Patel, 2017).
Thus, ROI is significant in rating capital projects, programs, purchases, and
initiatives as well as investment in stock shares. It is also used to assess future returns of
education cost and use of venture capital. ROI is a popular and generally applied financial
metric. Nonetheless, decision-makers and financial analysts must always keep in mind that
companies who produce a return on investment figures always have a poor grasp of the
weaknesses of the metric and unique data needs. It is essential as an investor to ask for data
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sources when the ROI figures are from an unknown source in order to compute the right results
for strategic decision-making. Besides view ROI measuring profitability, business people borrow
a term in economics filed to claim that ROI refers to company efficiency (Rubin & Patel, 2017).
However, this usage is arguably less helpful since many people use efficiency to describe the
meaning of metrics such as the payback period, an internal rate of return and a return on the
capital employed.
It is arguably true to say that decision-makers should not rely on ROI alone to
make investment decisions since it is not a sufficient basis for choosing one action over another.
This is because the return on investment shows how returns are compared to costs, especially if
the anticipated results are realized. Therefore, ROI shows anticipated profits but says less or
nothing about risk and uncertainty. Thus, it is always wise to estimate the probability of different
ROI results and people making decisions should consider both the risks and metric size that
come with it. Consequently, people making decisions will most likely anticipate the analysts to
generate a return on investment figures and measure the risk of the project as well as provide
realistic advice on approaches to progress ROI by a reduction in costs, increasing revenue and
growing gains in time.
Return on Investment on Education
ROI can be used to measure the financial benefits gained by an individual over a
specific period in return to a given investment in an education or training programme (Rubin &
Patel, 2017). Return on education is complicated to field to measure due to the validity of
forgone earnings as a proxy for total costs of education. For example, considering both direct and
indirect cost of education, it is possible to measure the ROI of education. Considering that a
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student expects to spend an expenditure of $50000 and a tuition fee of $200000 for the next five
years. The student is expected to earn employment paying 15000 dollars for the next 27 years.
His return on investment in education can be calculated as (expected income – the cost of
education) divided by the initial investment cost.
ROI = [15000 × 27 – (50,000+ 200000)]/250,000
ROI = (405,000 – 250,000) 250,000
ROI = 155,000/250,000
ROI = 0.62 or 62%
The result of 62% means that the return on investment in education will be
positive but only when both costs and gains are undoubtedly due to the action and not due to
other causes. This means that the student can invest in education because there is an anticipated
ROI of 0.62 on the cost of education investment.
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References
Rubin, G. D., & Patel, B. N. (2017). Financial forecasting and stochastic modeling: predicting
the impact of business decisions. Radiology, 283(2), 342-358.
