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P. 8
PERFORMANCE MEASUREMENT
Why RI is superior to ROI (cont)
The company is considering a new investment with a cost of R45 000
and will generate income of R8 100.
Using ROI:
R8 100 / R45 000 = 18%
The current ROI is 20%, therefore a manager would not want to invest in
this project as the return is less than the current ROI.
Using RI:
R8 100 – (R45 000 x 15%) = + 1 350
The RI will increase by R1 350, therefore a manager would invest in this
project.
Therefore RI is superior as it is evident that the project increases shareholders
wealth (the return of 18% is higher than the cost of capital of 15%) however, if ROI
is used the project would be rejected as the return is less than the current ROI.
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