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Return on investment ROI is a common way of considering profits in relation to capital invested.

Return on Assets (ROA), Return on Assets (RONA), Return on Capital (ROC) and Return on Invested Capital (ROIC) are similar measures with variations on how 'Investment' is defined. Marketing not only create impact & leave influences on Net Profits but it also can affect investment levels too. There are three main Types of investments that can be affected by marketing decisions and that were new plants and equipment, inventories, and accounts receivable. In a survey of round about 200 senior managers, out of which 77 percent responded that they found the "return on investment" metric very useful. Purpose The main purpose of the "return on investment" metric is to evaluate and measure per period rates of return on amount invested in an economic entity. ROI and its connected metrics like (ROA, ROC, RONA and ROIC) gives a detail and clear picture of profitability adjusted for the size of the investment assets tied up in the enterprise. Some Marketing decisions have clear potential connectivity to the numerator of ROI (profits), but dome time these same decisions frequently influence assets usage and capital requirements (for example, receivables and inventories). So Marketers should realize the position of their company and the returns expected. ROI is also compared to expected (or required) rates of return on amount invested.

ECONOMIC VALUE ADDED (EVA)


Economic Value Added (EVA) term was formed & Introduce by a New York Consulting firm, Stern Steward & Co in 1982 to boost the value-maximizing behavior in corporate managers. Economic Value Added (EVA) term has been used in the book named The Quest for Value which was published in 1991. Stern Steward & Co insist EVA as their registered trade mark, while Peter Drucker also claimed that he discussed EVA in 1964 in his book, Managing for Results Infact, without going into any dispute as to who introduce EVA first that the concept became popular only when Stern Stewart & Co. published it. Basically EVA is a value-based measure that was designed to evaluate the business strategies, capital projects and to increase the long-term shareholders wealth. So the Value that has been making or damaged by the firm between the period can be measured

by comparing profits with the cost of capital used to produce them. The analytic thinking in detailed by using EVA may allow the managers to find out those activities which are less profitable and where the profits are being eaten-up. So therefore EVA allows the management to invest in projects that are critical to shareholder's wealth. Researchers have found that managers are more expected to answer to EVA incentives when making financial, active and investing decision (Biddle, Gary, Managerial finance 1998), permit them to be actuated to behave like owners. Although this behavior might lead to some managers follow their own targets and shareholder value at the price of customer fulfillment. Different conventional ways of performance measurement EVA focuses on ends and not means. So we can say In other words that it does not matter how manager can grow company's value as long as the shareholders wealth is maximized.

Calculation of EVA EVA = NOPAT (WACC X Capital Employed) Where, NOPAT means Net Operating Profit before Interest and after Tax WACC represents Weighted Average Cost of Capital.

EVA is sales less operating costs (including taxes) less all financing costs. In another way EVA is net operating profit after tax (NOPAT) less the cost of all capital, equity as well as debt. EVA = NOPAT - (Cost of Capital x Total Capital)

Economic Value Added Vs Return on investment


Rate of Return on Investment (ROI) Meaning Performance measure always used to assess the productivity of an investment or to evaluate the efficiency against number of different investments. So to calculate the ROI, the benefit (return) of an investment is separated by the cost of the investment, and the result is stated as a percentage or a ratio. Formula:

ROI

Profit After Tax Capital Employed

ROI is a very popular metric due to its many abilities and suppleness. If an investment does not have a positivistic ROI or if there are dome other chances with a higher ROI then the investment should be not be undertaken. Advantages: Return on Investment allows the management to evaluate both profitability and efficiency in using assets. Parts of unequal size can be compared. The Management is provided with information to make further decisions on where to invest additional company funds. Disadvantage: If a manager evaluated on based of ROI he or she will not invest in any work that will lower the division's ROI, although if it would increase the company's profitability.

Difference between ROI and EVA


Return On Investment Economic Value Added

Return on investment is an accounting measuring tool Return on investment is in accordance with tradition Return on investment is described in term of Percentage Return on investment does not take the cost of capital into consideration Return on investment can be used to Liken with the contestant and industry

Economic Value Added is performance measuring tool Economic Value Added is a advanced thought Economic Value Added is in currency Economic Value Added includes cost of capital Economic Value Added cannot be used for comparison

Advantages of EVA over ROI: With EVA all the business units have the same profit adjectives for the similar investment.
Conclusion that

increases a center ROI may decrease its overall profits.

Various interest rates/ depreciation rates may be used.

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