Question

What insight does ROI give into investment performance? Is it acceptable to lose profit on one product, if that product is vital to the sale of an extremely profitable product? Why?

As you think about these questions, also consider what other measures beside ROI might be help in analyzing solutions to business problems – or opportunities

Answer 1

ROI or return on investments help to estimate the effectiveness of amount invested for any business or economic activity. Money or capital can be deployed in to various investments. As we know that money is limited , it becomes imperative to know which option will provide maximum increase in our investments. Here comes the role of ROI computation. The investment option with highest ROI should be chosen among many if risk of all the option is same.

To have maximum ROI , what matters more is to have total profie maximised. Some times a profitable product's is dependent upon sale of a loss making or less profitable product. In that case , we need to have a look at total returns which we will get from both the products and if the resultant profit is more then yes loss making product can also be continued. For example: Internet broad band companies may prefer to provide Modem as free if the service is subscribed for 12 months. In this case they may be making a loss on modem but a certain return on 12 months service chargs.

The other measure which can help choosing buiness problems are - availability of capital , risk inherent in all the opportunities , pay-back period ( the time in which the capital deployed will be paid back)