Accounting

Accounting

Part A= 1979 words

Part B = 1207 words

Part A

Introduction

Return on Investment (ROI)

ROI is used to evaluate the efficiency of an investment, or in other words it is used to compare the efficiency of different investment done in a large amount. To calculate ROI, difference of investments (gain from investment and cost of investment) is divided by the cost of investment. The result will come in a ratio or in a percentage:

Mathematically;

(Xerox 2010)

ROI is a confusing tool (Xerox, 2010 pp. 01). Normally it is used to mean a specific financial measurement while in other cases; it is used as a collective expression to ROI.

Comparable with the rate of return on opportunities, inside and outside the company. It highlights profits from minimizing in fixed and current assets (Riccaboni, 2010 pp. 05).

There are two ingredients in profit making of ROI

a. Using assets to generate more profits.

b. Maximizing income per unit of revenue.

Benefits of ROI calculation

Return on Investment (ROI) reduces the cost. It also helps in productivity or in other words it increases the productivity. ROI helps in improving process. It also reduces the waste (Xerox, 2010 pp. 01).

Cost of calculating ROI

The cost of the proposal will be a onetime expense or a continuing cost. It involves the number of considerations. Start with the hard costs and the obvious ones.

a. It involves a number of people.

b. Consulting fees

c. Estimating hours and labour rates

d. Training cost

e. Other costs like supplies, software, hardware, etc (Xerox, 2010 pp. 01).

Factors outside ROI

In ROI, factors beyond the numbers have to known. ROI proposal can affect suppliers, employees, customers and prospects. Non-financial impacts are:

a. Morale

b. Attitude

c. Image

d. Satisfaction

e. Ease of use

f. Retention

g. Environment

Understanding ROI will help in making decisions with positive financial profits and keep the business moving forward.

Economic Value Added (EVA)

The economic value added (EVA) is a tool of the surplus value formed by an investment or a number of investments. It is calculated as the product of the "excess return" made on investments and the capital invested in those investments. Basically, economic value added (EVA) is the economic profit a firm gets after all capital cost are subtracted (James et.al., pp. 408).

It is a company's net operating profit after tax (NOPAT) minus a dollar-amount cost of capital charge for the capital employed (James et.al., pp. 408). EVA is an authorized trademark of Stern Stewart & Co.

Every financial measure has its respective weaknesses and strengths (Oview 2005, pp.5). EVA's strength comes from its explicit identification that a company is not really creating shareholder value until it is able to cover all its capital costs (James et.al., pp. 408). A positive EVA shows that the shareholder value is being created, whereas a negative EVA shows value destruction. (James et.al., pp. 408). EVA enjoys enhancing the popularity because it serves a constant reminder to managers that they have not really done a better job until and unless they have received ...