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Hello sir, wanted to understand how do companies measure the Renton on investment from an acquisition done last year? What matrix is used?
Is it RoI=net profit/amt invested? Or
Is it market cap of acquiree/amt invested? Or
Is it enterprise value of acquiree/amt invested?
If they were calculating return on investment on a future investment they would take each year’s income arising from the machine and divide by the net book value of the machine (usually as at the start of the year). This sets out the predicted ROIs for each year and these often increase with time because the NBV keeps decreasing.
There could be other ways such as enter the sale value of the asset (second-hand value) on the bottom of the equation. This might indicate whether they should continue with the investment. For example the company could have bough land and built a factory which earns a modest profit. However, if the land suddenly became more valuable then it would be worth seeing that the ROI had fallen. Really, what we are doing then is a form of relevant costing and the company should choose to opt for the higher of the value of the asset through future use and the sale value of the asset.