Week 4 Assignment 2 - David A Givens III Government...

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David A. Givens III Government Budgeting Systems Instructor: Mary Cline Week 4 Assignment 2 Advanced Decision Tools - ROI, Cost-Benefit Analysis, and Fiscal Impact
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1 The focus of this paper will be three advanced decision-making tools used in the public budgeting process. Those tools are Return on Investment, Cost-Benefit Analysis, and Fiscal Impact Analysis. Their processes will be describe with their strengths and weaknesses will be evaluated. They will also be compared to other advanced tools. The first tool to be assessed is Return on Investment (ROI). This metric is used to measure rates of return on money invested in an economic entity in order to decide whether or not to undertake an investment. It can also be used to compare the efficiency of a number of different investments. Metrics like ROI provide a glimpse of profitability. For one to calculate ROI the benefit of an investment is divided by the cost of the investment, and the result is expressed as a percentage or ratio. Here is the ROI formula: Here is an example: An investor buys $1,500 worth of stocks and sells the shares two years later for $2,000. The net profit from the investment would be $500 and the ROI would be calculated as follows: ROI = (500 / 1,500) x 100 = 33% The ROI in the example above would be 33%. The calculation can be altered by deducting taxes and fees to get a more accurate picture of the total ROI. The main strength of ROI is its versatility. Since it comes in a variety of models an investor can select one that best fights their needs. It can also serve as a point of comparison
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2 between several different investment opportunities. One drawback to an ROI is that while it uses expected cash flows and costs in its calculations, it doesn’t factor in the likelihood that those returns and costs will match the predictions.
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