ITPEC FE Morning April 2022 Question 63
In computerization investment planning, which of the following is an explanation of ROI as an evaluation index for investment value?
Explanation
Profit from the investment divided by the amount invested — ROI measures how much return each unit of investment earns.
In computerization investment planning, the effect of the system (sales increase, cost reduction and similar gains) is turned into profit and set against its cost: ROI = profit ÷ investment (often shown as a percentage). An investment of 10 million that brings 2.5 million of profit has an ROI of 2.5 ÷ 10 = 0.25, or 25%. The higher the ROI, the better the investment uses its money.
Answer (b)
Why not others:
- •(a) — the competitive position lost if the project is not carried out is an opportunity-loss view; it does not relate profit to the money invested
- •(c) — the present value of cash inflows minus the present value of cash outflows is NPV (net present value), an amount, not a ratio
- •(d) — comparing ratios such as sales to investment or investment per employee with other companies is benchmarking
Key rule: ROI is a ratio of profit to investment; NPV is a difference of discounted cash flows; comparing with other companies is benchmarking.
System Planning · AI-written, may contain errors
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