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Ri is more flexible since a different cost of capital can be applied. <<
May I know how to explain it??How about for ROI can have this advantage too?
What you have written in your first line explains it – they can use different rates for the notional interest.
With ROI, there is no cost of capital used in the calculation of it and therefore it is not an advantage of ROI.
okk sir How about ROI and RI is tied in with NPV, thereotically the best way to make investment decisions?
I do understand that RI is tied in with NPV because of the use of cost of capital. So how about ROI, how does it relates to NPV?
Thankss you sirr
Neither of them relate directly to NPV. They are ways of appraising the performance of the divisional managers, with the intention of motivating them to do what is best for the company.
Both ROI and RI are profit based measures, whereas NPV is a cash based measure (but it is impossible to measure the managers performance each year based on NPV’s).
Have you watched my free lectures on this?
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