F5 – ROI vs RI

ROI 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.

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)