Using ROI may cause a manager to reject a project that may be profitable to the company as a whole. ROI stands for Return on Investment.
EXPLANATION
In absolute terms, a segment that has a large number of assets usually produces more than a segment that has a small number of assets. But this is not certain. Therefore, companies cannot use the absolute amount of revenue from a segment to compare the potential of different segments. To measure the effectiveness of a relative segment a company can use return on investment (ROI), which calculates returns (income) as a percentage of assets used (investment). Here is the formula for ROI:
ROI = Segment Income
/Investment Base
For example, a segment that generates $5 million with an investment of $50 million has a ROI of 10% ($5 million / $50 million). Return on investment always reported as a percentage. Return on investment means how much income we make for each investment dollar we spend. In the example above ROI is 10%, this means the company makes 10 cents for every $1 investment.
By applying return on investment (ROI) it is expected that a manager is able to determine whether the segment is profitable or detrimental to the company. Because managers are responsible for income, financing, and investment-related to a segment/project. The manager will release investment opportunities that can provide more than enough ROI for the company as a whole, but which will provide lower ROI than the ROI that is already in the center, which will reduce the overall ROI of the center.
LEARN MORE
If you’re interested in learning more about this topic, we recommend you to also take a look at the following questions:
• The return on investment (ROI) from education is typically the highest for
brainly.com/question/1304876
KEYWORD: ROI, investment, company.
Subject: Business
Class: 10 - 12
Subchapter: ROI
