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Definition

Return on investment (ROI)

The primary basis for evaluating the performance of a manager of an investment center is return on investment (ROI) which refers to a measure of management’s effectiveness in utilizing assets at its disposal in an investment center.

The formula for computing ROI for an investment center, together with assumed illustrative data, is shown in illustration below:

                  Controllable Margin ÷    Average Operating Assets = Return on Investment (ROI)

                              $1,000,000 ÷       $5,000,000                     =       20%

In Marketing Return on Investment (ROI) refers to a measure managerial effectiveness and efficiency- net profit before taxes divided by total investment. This investment includes capital investments in land, buildings and equipment plus inventory costs.

 Return on Investment = Net profit before taxes ÷ Total investment

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