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In: Economics

Explain in detail what is Return of Investment (ROI) & Discounted Return on Investment (DROI).

Explain in detail what is Return of Investment (ROI) & Discounted Return on Investment (DROI).

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Expert Solution

ROI

ROI is a method used for valuating the investments effectivenes . The gain produced on the investment can be calculated by ROI . ROI is written in terms of percentage . Different investments effectivenes as well as the profit of a company can be compared using ROI . Return of investment is , net profit divided by investment cost .

ROI = ( net profit / cost of investment ) × 100

Companies uses ROI in their business to calculate the efficiency of the investments . The benefit that an investor receive on their investments can be measured by ROI . Whenever the percentage produced is more , then they get more benifits .

Benifits of ROI

ROI is a very simple and effective method and it is very easy to do the calculations . It is a universally accepted method .

Discounted return on investment ( DROI)

ROI method used for long term investments , so that the time value of money can be estimated . This is known as discounted return on investment . DROI is the ratio of current total value of gain and current total value of costs . DROI is used for long term investments and it can be used to estimate the current value of the future flows of cash . This can be done by finding the product of cash flow and discount rate . The current value of the future cash flows will become low , whenever the discount rate become higher .

Rahul Sunny answered 1 year ago
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