Return on Investment (ROI)

The return on capital employed is used as a criterion for making investment decisions. Net capital employed, consisting of total assets minus current liabilities, is used to calculate the return Net profit is used as return.

• Satisfactory return is influenced by the nature of business, risks involved, comparative return from fixed deposit in Banks, and external economic conditions.
• If the ROI is satisfactory, the project is accepted.

Advantages of ROI

• It is simple to calculate, operate and understand. 
• It considers the cash flow throughout the life of the project.
• It serves as a standard to compare profitability of alternative projects.

Disadvantages of ROI

• It ignores time value of money.
• It is difficult to define what is satisfactory rate of return.
• It ignores varying profit from various projects.