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2. (a) Explain the term ‘Return on Investment’ (ROI) - Leaving Cert Business - Question 2 - 2011
Question 2
2. (a) Explain the term ‘Return on Investment’ (ROI). (b) Using the figures below calculate the ROI for ‘Natural Options Ltd.’. (Show your workings.) Net Profit ... show full transcript
Worked Solution & Example Answer:2. (a) Explain the term ‘Return on Investment’ (ROI) - Leaving Cert Business - Question 2 - 2011
Step 1
Explain the term ‘Return on Investment’ (ROI).
Answer
Return on Investment (ROI) is a financial metric used to assess the profitability of an investment. It represents the net profit that a business generates from the total finance utilized by the business, commonly referred to as capital employed.
ROI measures how effectively a company is using its invested capital to generate profit. A higher ROI indicates that the investment gains compare favorably to its cost, thus reflecting a more effective use of capital.
Step 2
Using the figures below calculate the ROI for ‘Natural Options Ltd.’.
Answer
To calculate the Return on Investment (ROI) for ‘Natural Options Ltd.’, we use the following formula:
First, we need to determine the total capital employed:
- Ordinary Share Capital: €140,000
- Reserves: €56,000
- Long Term Loan: €24,000
Total Capital Employed:
Now, substituting the known values into the ROI formula:
Calculating the ROI:
Thus, the ROI for ‘Natural Options Ltd.’ is approximately 26%.