Which method of calculating return on investment (ROI) makes it easiest to compare different investments?

• A. Annualized rate of return
• B. Gross profit margin
• C. Total dollar return
• D. Simple payback period

Answer: (A)

Verified step by step guidance

1. Understand the concept of Return on Investment (ROI): ROI is a financial metric used to evaluate the efficiency or profitability of an investment relative to its cost. It helps compare the performance of different investments.
2. Analyze the options provided: Each method listed (Annualized rate of return, Gross profit margin, Total dollar return, Simple payback period) measures investment performance differently. Consider their definitions and applications.
3. Evaluate 'Annualized rate of return': This method standardizes the return over a year, making it easier to compare investments with different time horizons. It accounts for compounding and provides a consistent basis for comparison.
4. Evaluate 'Gross profit margin': This measures profitability as a percentage of revenue but does not directly address investment returns or allow for easy comparison across different investments.
5. Evaluate 'Total dollar return' and 'Simple payback period': Total dollar return provides the absolute return but lacks standardization for comparison. Simple payback period focuses on the time to recover the initial investment, which may not reflect overall profitability or efficiency.