Define return on investment (ROI) and its use in project appraisal.

Define return on investment (ROI) and its use in project appraisal.

• A. ROI is the total cost of a project; used to determine funding levels.
• B. ROI measures net benefits relative to cost; used to compare projects and decide which to fund.
• C. ROI is a measure of market share growth.
• D. ROI is the interest rate charged on borrowing funds.

Answer: (B)

Return on investment is a way to express how profitable an investment is by comparing the net benefits it generates to the amount of money invested. In project appraisal, you estimate the benefits (such as revenue increases or cost savings) and subtract the costs to get net benefits. Then you divide those net benefits by the cost, usually as a percentage. This gives you a common metric to compare different projects and decide which ones to fund, prioritizing the ones that deliver the most return per unit of investment. It’s not simply the total cost, not a measure of market share growth, and not the interest rate on borrowing. Those other concepts describe different ideas.

Return on investment is a way to express how profitable an investment is by comparing the net benefits it generates to the amount of money invested. In project appraisal, you estimate the benefits (such as revenue increases or cost savings) and subtract the costs to get net benefits. Then you divide those net benefits by the cost, usually as a percentage. This gives you a common metric to compare different projects and decide which ones to fund, prioritizing the ones that deliver the most return per unit of investment. It’s not simply the total cost, not a measure of market share growth, and not the interest rate on borrowing. Those other concepts describe different ideas.