Correct Answer - Option 2 : Return on investment method
Explanation:
Return on investment (ROI):
- It is a financial metric that is widely used to measure the probability of gaining a return from a capital investment.
- It is a ratio that compares the gain or loss from an investment relative to its cost.
- It can be used to measure the profitability of a stock investment, when deciding whether or not to invest in the purchase of a business, or evaluate the results of a real estate transaction.
Net present value (NPV):
It is a method used to determine the current value of all future cash flows generated by a project, including the initial capital investment. It is widely used in capital budgeting to establish which projects are likely to turn the greatest profit.
\(NPV = \frac{{{R_t}}}{{{{\left( {1 + i} \right)}^t}}}\)
NPV = net present value
Rt = net cash flow at time t
i = discount rate
t = time of the cash flow
Cost-benefit analysis (CBA): It is a technique used to compare the total costs of a program/project with its benefits, using a common metric (most commonly monetary units).
Payback method:
- It is a method of evaluating a project by measuring the time it will take to recover the initial investment.
- The payback period is the number of months or years it takes to return the initial investment.
- To calculate a more exact payback period: payback period = amount to be invested/estimated annual net cash flow.
- The payback method also ignores the cash flows beyond the payback period; thus, it ignores the long-term profitability of a project.
