In: Accounting
How do you evaluate an operating segment or project using return on investment?
Operating segment using return on investment:- Operating segment performance may be evaluated using either Return on Investment or Residual Income. ROI measures the segments ability to utilize its operating assets to generate income.
Operating project using return on investment:- An indicator used to measure the financial savings/gain (or loss) of a project in relation to its cost. Typically, it is used in determining whether a project will yield positive financial benefits, and in turn giving approval to proceed.
Project ROI = ((project’s financial gain or loss – project’s cost) / project’s cost) X 100.
In the above
formula, "Gain from Investment” refers to the
proceeds obtained from the sale of the investment of interest.
Because ROI is measured as a percentage, it can be easily compared
with returns from other investments, allowing one to measure a
variety of types of investments against one another.