Forums › ACCA Forums › ACCA PM Performance Management Forums › F5 – ROI vs RI
- This topic has 3 replies, 4 voices, and was last updated 11 years ago by Anonymous.
- AuthorPosts
- May 31, 2013 at 9:55 pm #128049
Hi Sir,
We know that the ROI (Return on Investment) & RI (Residual Income) are two types of performance measures in Investment centres.
Can you please define the 2 approaches and outline the Advantages and Disadvantages of the two please.
Thanks
June 1, 2013 at 1:26 pm #128104ROI vs RI: 1) ROI is to measure the efficiency the asset are being used to generate profit…..RI is simply using profit by deducting a finance charge (cost of capital) which is based on the net assets.
2) ROI major advantages is to enable to make comparison by taking full account of different size of business.RI cannot used to comparison purpose.furthermore,,if ROI is based on measure by gross asset(which without deduct accumulated depreciation) does not distinguish new and old asset……
advantages of RI: 1: Ri is more flexible since a different cost of capital can be applied.
2:RI will be a positive figure when investment earning are above the interest charged.June 1, 2013 at 8:07 pm #128145Additional advantages of ROI:
– as it is similar to ROCE, ROI is more understood by managers
– if the manager has some alternatives how to use assets – he may choose on higher ROIDisadvantages of ROI:
– if company has ROI of 20%, and current division’s ROI is 25% – division may refuse of new project with ROI only 22% (for company this new project is attactive, but for division will dilute its ROI)June 29, 2013 at 6:31 pm #133423AnonymousInactive- Topics: 0
- Replies: 1
- ☆
ROI is calculated as net operating income/ average operating assets. This helps managers in decision making on how they can improve ROI. Any increase in Roi involves any of the following:
1. increased sales.
2. Reduced Expenses.
3.Reduced Assets
Disadvantages.
1.Roi can be manipulated by charging higher dpn rates to get reduced assets therefore higher ROI.
2.Managers may align actions to boost short run perfomance at expense of of long term performance because they are evaluated by ROI.
3. ROI uses historical values for capital employed so it can not be compared well with new projects.RI-is the net operating income that the investment center earns above the minimum required rate of return on its operating assets. it is calculated by net operating income-( average operating assets X mimimum required rate of return)
- AuthorPosts
- You must be logged in to reply to this topic.