Guide on Return on Investment (ROI)
Return on Investment (ROI) is a critical metric in project cost management under the broader concept of the capital asset pricing model (CAPM).
Why is it important?
ROI is crucial because it quantifies the profitability of an investment or project. It expresses the net benefit (profit or loss) as a percentage of the total investment to reasonably compare different investments. Further, it assists investors in making informed decisions.
What is Return on Investment?
It is the ratio between the net gain from an investment and the cost of the investment. The formula to calculate ROI is (Net Profit / Cost of Investment) x 100%.
How does it work?
A positive ROI implies a profitable investment, while a negative one suggests a loss. A higher ROI percentage indicates higher profitability.
Exam Tips: Answering Questions on ROI
In an exam situation, understanding the concept and formula is essential. Here are few tips:
- Be clear about what constitutes the 'Net Profit' and 'Investment Cost'.
- Understand the implications of a positive, negative, and zero ROI.
- When asked for comparative analysis, the investment with higher ROI is usually the more profitable one.
- Where possible, provide detailed workings and explanations to support your computation, and use real-life examples to support your arguments.
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Return on Investment (ROI) practice test
ROI is a performance measure to evaluate the efficiency of an investment. In the project management context, it's used to understand the amount of return on a project relative to the project’s total cost. It can be calculated as (Net Profit/Total Project Cost) * 100. This concept is crucial for project selection, as projects with higher ROI are more likely to be chosen.
Time: 5 minutes Questions: 5
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Certified Associate in Project Management Preparation Package (2024)
- Earn 15 PDUs needed for your CAPM certification
- 6432 Superior-grade Certified Associate in Project Management practice questions.
- Accelerated Mastery: Deep dive into critical topics to fast-track your mastery.
- Unlock Effortless CAPM preparation: 5 full exams.
- 100% Satisfaction Guaranteed: Full refund with no questions if unsatisfied.
- bonus: If you upgrade now you get upgraded access to all courses