Responsibility Centers

4. Investment Centers –

4. Investment Centers –
Output
Inputs
RC’s (Money/net profit
(Money spent for
Earned on account
Starting the TASK
of investment)
business)

• Objective – Make sound investment decision

• It compares Business units profits with assets
employed to earn that profit,/ efficiency of assets
employed.
• Performance measure used to evaluate the IC is ROI
and/or EVA. both the goals of business organizations
• It satisfies
i.e. to earn adequate profit and profits earned and
assets employed must have optimal relationship.
ROI and EVA are the two ways to relate profit to assets
employed.
Return on Investment –

Return on Investment-
 Relating the profits of a firm with
the investment made.
 ROI can be computed in many different
ways depending upon the need and
relevance.

1. Return on Assets - ROA

2. Return on Capital Employed -
ROCE
3. Return on Shareholder’s Equity -
Return on Investment – Return on Assets

Net Profit
1) Return on Assets = --------------- * 100
Assets
Assets may take the form as -
Total Assets,
 Fixed Assets,
Gross Assets,
Net Assets Or
Tangible Assets
 Employed Assets
 Return on Investment – Return on Capital
Employed

Net Profit
2) Return on Capital Employed = ------------------ *
100
Capital Employed
Capital implies the long term funds
supplied by creditors & owners
Alternatively one can say it as
Net Working Capital + Fixed
Assets
 Return on Investment – Return on Shareholders’
Equity

Net Profit
3) Return on Shareholders’ Equity = ---------------- *
100 Equity Capital

Equity includes the preferential capital, however the

ordinary shareholder bears the entire risk.
Net Worth represents the equity capital plus the reserves
and surpluses the portion solely represented by equity
holders’.
Net Profit- Pre. Divi.
Return on Shareholders’ Equity = ------------------- *
100 Net Worth
Thank You ……..