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

• A. Using the payback period
• B. Using percentage returns
• C. Using the nominal value of investments
• D. Using total dollar returns

Answer: (B)

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. It is typically expressed as a percentage and calculated using the formula: ROI = ((Net Profit / Investment Cost) × 100).
2. Analyze the options provided: The payback period measures the time it takes to recover the initial investment, but it does not account for profitability or percentage returns. Nominal values and total dollar returns provide absolute figures but do not allow for easy comparison across investments of different sizes.
3. Recognize why percentage returns are ideal for comparison: Percentage returns standardize the ROI calculation, making it easier to compare investments of varying scales or costs. For example, a \$10,000 investment yielding \$2,000 profit has the same ROI percentage as a \$100,000 investment yielding \$20,000 profit.
4. Consider the advantages of percentage returns: They provide a clear and proportional measure of profitability, allowing investors to assess which investment generates the highest return relative to its cost.
5. Conclude that using percentage returns is the most effective method for comparing different investments, as it provides a normalized metric that is independent of the investment's size or nominal value.