Making a Financial Case, Fourth Edition
Whether studying for an ILM qualification or looking to enhance the skills of your employees, this book provides essential solutions, frameworks and techniques to support management and leadership development.
TABLE OF CONTENTS Making a Financial Case, Fourth Edition
5: Return on Investment
5 Return on Investment
Return on investment, which you may also hear called accounting rate of return is a financial appraisal technique which tackles the problem that payback takes no account of income after the payback period. Return on investment looks at the overall income and expenditure over an entire project and is calculated as the:
How do you calculate the average investment. If a business purchased equipment for 8,000 with an expected four-year life and no projected scrap value at the end of its life, the average investment would be 8,000/4 = 2,000.
Assuming an average annual project net profit of 500 each year from the use of the equipment, the return on investment would be:
If an organization has a choice between investments, the one with the highest return on investment would be selected, using this method of financial appraisal.
Activity 20 
Media Advertising Associates offer two advertising packages to their clients for advertising cosmetics:
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television and cinema advertising, which costs 1,000,000 annually and is likely to generate an average annual net profit of 140,000;
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newspaper, magazine and hoarding advertising, which costs 220,000 annually and is likely to generate an average annual net profit of 33,000.
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Use the return on investment method to decide which is the best option for clients.
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The calculations for the two advertising packages are:
and
The cheaper investment using newspapers, magazines and advertising hoardings represents better value for money.
However, if...
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