Essay about Overview about Return on Investment and Economic Value Added

Submitted By gana24
Words: 3750
Pages: 15

PART 1
Introduction
Based on the questions this paper given correct answer, the paper is divided into two parts. The first part shows the response about the first question, while the second part shows the response on the second question. Accounting is a record of an organization current situation. To understand Management accounting method, the main purpose of accounting is to provide decision making information to owners, creditors and government agencies. In a general extant, accounting also helps to guide in the economic resources management (Seiler, 1959). Accounting covers the collection and measurement of financial data and presents this to relevant parties who are engage in decision making process. (Chandra and Paperman, 1976)

2.0. Overview about Return on Investment and Economic Value Added (EVA)
Return on investment (ROI)
Common ratio measurement that used for assessing the potential of an investment is Return on Investment (ROI). ROI is also known as “rate of return” or “return”. Profit or loss is divided with the amount of the investment to calculate the Return of Investment. A company must make sure that it only provides a positive ROI when evaluating an opportunity. A positive ROI offers a higher return than any other alternatives. ROI calculation’s accuracy is the focus to the quality of the return and there cost data used in its calculation.
Financial efficiency of investment opportunities measure by ROI models which are serve as standardized metrics. ROI is generally been used to explain an opportunity to others. Investors of an investment can choose one best models which suits with their goals and objectives because there are variety of models in ROI. ROI models also act as a point of comparison between different types of investment opportunities.

ROI = Gain from Investment — Cost of Investment
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Cost of Investment

For example, Toyota has a net income after the expenses of $2.5 million and the cost of investment was $91.5 million. If you divide the net income by the cost of investment, the ROI is 0.027.


Economic Value Added (EVA)
EVA can be defined as the change in the NOPAT (Net Operating Profit after Taxes) minus the change in the Cost of the Capital used to generate this NOPAT (Rappaport, 1998; Kumar and Kaura,2002).Economic value added (EVA) also defined as an internal management performance measure that compares net operating profit to total cost of capital. Stern Stewart & Co. introduce the global market with this trademarked concept.
EVA = Net Operating Profit after Tax - (Capital Invested x WACC)
Three important components are needed to solve Economic Value Added (EVA). The three components are net operating profit after tax (NOPAT), invested capital, and the weighted average cost of capital (WACC) which operate profit after taxes (NOPAT). It is normally found on the corporation’s income statement.
2.1 Advantages Return on Investment (ROI) and Economic Value Added (EVA)
Advantage of using return on investment
Advantages of Return On Investments (ROI) is utilized to control the full operation of a business which concentrates on managerial decision making for the business. ROI use to measure the productivity as an overall company and specific main department in the company. Besides that, ROI typically will attract our attention away from expand the sales and focus fully on the factors that promote effective operation. Other than that, ROI is very successful because all the power is decentralized in it. Departmental managers are answerable for all the money that are invested by the investor in the business, ROI guarantee them to handle the investment from the viewpoint of top management. Managers regularly keep up in heavy capital investments for new equipment for lower costs to expand the sales without contemplating the impact in the whole company. ROI will be affected by the increase of the inventories. ROI is…