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Why might you want to avoid using the ROI approach to evaluate a project that requires...

Why might you want to avoid using the ROI approach to evaluate a project that requires an initial investment of $100,000 and will provide a return of $5,000 per year for 10 years, as well as a balloon payment of $100,000 on the tenth year?

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Answer #1

ROI (Return on invrstment approachl is calculated as Net profit / Total investment made and does not consider time value of money. Moreover, ROI calculates return for a specific period of time say one year. In this case, the cash inflows are distributed in 10 yeas followed by $100,000 balloon payment on the tenth year.

In order to evaluate this project. Net Present Value (NPV) method should be used which is calsulated by deducting the initial inventment or cash outlay by the present value of cash inflows which are genedated ovet 10 year.

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