Ch15%282%29+-+Note+%2B+Additional+Qs+Posting - Chapter...

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Chapter 15(2) – Summary of Various Financial Measures 1 FM Formula Advantages (Features) Disadvantages ROI DuPont = TATO x ROS or =TATO x Profit Margin % Most popular approach Can be compared with opportunities inside or outside company Highlights benefits of reducing investment (idle cash, inventory, fixed assets) Increase Income (decrease costs) Use assets to generate more revenue (decrease investment) Used in markets where revenue growth is limited and investment levels fixed. Evaluate overall aggregate performance May cause dysfunctional effects: encouraging managers to invest only when the ROI on new investment exceeds the existing ROI – a goal congruent problem. RI Income (RRR x Investment) (Pre-tax/no interest) (imputed cost – Interest) (after depreciation) RRR = Required Rate of Return Or Target Rate of Return Absolute amount ($) Goal congruence more likely to be achieved Imputed costs represent opportunity costs or return forgone from alternate use of
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Ch15%282%29+-+Note+%2B+Additional+Qs+Posting - Chapter...

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