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Managerial Applications of Technology(ROI and Break-Even Analysis Techniques )3 - Assignment Example

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ROI is an efficient means evaluating the efficiency of any investment. Furthermore, businesses use ROI to compare a number of different investments (Strotheide, 2001).
ROI is easy to calculate,…
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Managerial Applications of Technology(ROI and Break-Even Analysis Techniques )3
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Managerial Applications of Technology (ROI and Break-Even Analysis Techniques) Return on Investment is a popular ratio used to measure a company’s performance. ROI is an efficient means evaluating the efficiency of any investment. Furthermore, businesses use ROI to compare a number of different investments (Strotheide, 2001).
ROI is calculated by dividing the return of investment by the cost of investment. It is usually expressed in percentage form. The returns of investment come from the sales of investment of interest.
ROI is easy to calculate, and financial experts label it as simple and versatile. It is simple because if an investment does not indicate a positive ROI or if other investments indicate a higher ROI, then undertaking the investment would be unfortunate (Rico, 2001).
The results of ROI are accurate. Nevertheless, ROI could estimate the return of investment by just looking at the benefits associated with the investment.
For example, if an investor buys $5000 worth of stocks and sells the shares for $7000 later. The profit would be $2000, and to calculate ROI:
ROI= (2000/5000) * 100
The above calculation could be altered by deducting fees and taxes to get the accurate ROI.
A break-even point indicates when an investment will generate profits. The break-even analysis shows the relationship between fixed costs, variable costs and returns.
Businesses could use either graphs or simple calculations to determine the break-even point.
To conduct a break-even analysis, it is important to note the fixed costs and variable costs. Fixed costs are incurred after investors agree to enter into a business activity. Variable costs include the cost of goods sold or production expenses.
In the graph below, the broken horizontal line indicates the total fixed costs. The total variable costs are
indicated by broken lines loping upwards. The line means total variable costs increase as production increases (Gutierrez, 2014).
The total cost (total fixed cost + total variable costs) parallels the total variable cost line.
The break even point is point P, the intersection of the total cost line and total income line. The vertical line from point P shows level of production necessary to cover all cost (Gutierrez, 2014).
There is another alternative for calculating the return of an investment and to calculate value to shareholders. The alternative is net value present. It includes the investments, returns, cost of capital, and risk premium in one equation. It removes the component of interest from future cash flow. Such case allows a manger to put both the initial capital investment and future cash flows on same level.
References
Gutierrez, P. (2014). Break-Even Method of Investment Analysis. Colorado State University.
Rico, D. (2001). Practical Metrics and Models for Return on Investment.
Strotheide, B. (2001). Selecting Information Technology Projects. Research paper. Read More
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