Return on Investment

Topics: Rate of return, Investment, Profit Pages: 5 (1463 words) Published: March 23, 2013
Table of Contents
1. Introduction2
2. Literature review3
2.1. ROI Case Study: IBM- November 2012 (Nucleus Research)3
3. Methodology4
4. Analysis5
4.1. Adani Power5
4.2. Torrent Power6
5. Conclusion7

1. Introduction
An investment is an exposure of cash that has the objective of producing cash inflows in the future. The worthiness of an investment is measured by how much cash the investment is expected to generate. The analysis of Return on Investment (ROI) is a financial forecasting tool that assists the business manager in evaluating whether a proposed investment opportunity is worthwhile within the context of the company’s business objectives and financial constraints. The investments to be analysed have some of the following characteristics: * A major amount of money is involved.

* The financial commitment is for more than one year.
* Cash flow benefits are expected to be achieved over many years. * The strategic direction of the company may be affected. * The company’s prosperity may be significantly affected if the investment is made or not made. Every business should aim to earn a realistic rate of return on the total capital invested in that business. The capital invested in a business is the total worth of the business, which includes the equity or owner’s capital plus the value of all the assets employed in the business less the liabilities of the business. A comparison of this ratio with similar firms, with the industry average and over time would provide sufficient insights into how efficiently the long term funds of owners and lenders are being used. The higher the ratio, the more efficient is the use of capital employed.

2. Literature review
The purpose of the Return on Investment (ROI) metric is to measure, per period, rates of return on money invested in an organization in order to decide whether or not to undertake an investment. ROI provides a snapshot of profitability, adjusted for the size of the investment assets tied up in the enterprise. ROI is often compared to expected rates of return on money invested. Marketing decisions have obvious potential connection to the numerator of ROI (profits) but these same decisions often influence assets usage and capital requirements (for example, receivables and inventories). Marketers should understand the position of their company and the returns expected.

2.1. ROI Case Study: IBM- November 2012 (Nucleus Research)
The city of South Bend, Indiana, used IBM Intelligent Operations Center to improve its water management. Nucleus found that integration of IBM technologies with the city’s smart valves and sensors helped the city to gather and analyze sewer system data more efficiently. This Smarter Cities project enabled South Bend to be proactive in its water management to reduce the number of incidents from about 30 to only one or two a year, reduce dry weather overflows by 95 percent, and increase capture and treatment by 23 percent. By doing this the city was able to avoid additional infrastructure investments and improve public health and safety while avoiding potential EPA penalties. ROI: 123%

Payback: 1.3 years
Average annual benefit: $326,321

3. Methodology
ROI measures the performance of a company as a whole in using all sources of long-term finance. For calculating the ROI following formula has been used, ROI = Operating profit (before interest and tax) / Capital employed * 100 Capital Employed = Ordinary share capital + reserves + long term loans Profit before interest and tax is used in the numerator as a measure of operating results. It is sometime called ‘earnings before interest and tax’ and is abbreviated to EBIT. Return on capital employed is often seen as a measure of management efficiency. The higher the ratio, the more efficient is the use of capital employed. Taking into consideration the power industry in India, two companies, Adani Power and Torrent Power are selected and the ROI is...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Return on Investment Essay
  • Return on Investment Essay
  • Return on Investment Essay
  • Essay on Return on Investment
  • Essay on Return on Investment
  • Investment and Return Essay
  • Essay about Investment and Return
  • Essay on Return on Investment Ashford

Become a StudyMode Member

Sign Up - It's Free