ROI & RI Flashcards
(9 cards)
1
Q
ROI Formula
A
Profit / Investment
2
Q
RI Formular
A
Profit - Charge for capital
3
Q
What figure do you use for profit in ROI?
A
- If controllable profit is given then use that
- However, you can also use net or operational profit.
4
Q
Capital Employed
A
- Usually use NCA + CA - CL
- But could also use debt + equity
5
Q
Charge for capital formula
A
- Cap employed x cost of capital (%)
6
Q
Criticisms of ROI
A
- Leads to dysfunctional decision making - managers personally benefit from not investing
- Manipulation of figures Eg. delaying capital expenditures
- Demotivated Employees
- Damage supplier relationships if purposefully keeping TPs
- unfair performance management for bonuses
7
Q
Benefits of RI
A
- Greater goal congruence than ROI - alignment of goals across different departments
8
Q
Controllable profit margin formula
A
controllable profit / sales x 100
9
Q
A
