Book Summary: Financial Intelligence Return-on-Investment

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Book Summary – Financial Intelligence Return-on-Investment
Understanding Return-on-Investment is essential for any manager. It allows him to appreciate better the strategies employed in the organization and provides a reasonable period over which the company, investors, and other stakeholders could see profits and returns. Accordingly, Part Six of Berman and Knight's book on Financial Intelligence talks about Returns-on-Investment (ROI). The authors specifically noted that ROI is necessary to appease the investors and for the further growth of one's assets in the future considering.
To start with, the authors first described the building blocks of ROI. One of the things that they noted was the importance of knowing this concept because of an asset's 'future value.' Specifically, the future value is defined as "what a given amount of cash will be worth in the future if it is loaned out or invested" CITATION Ber13 \l 1033 (Berman and Knight). In other words, a faster ROI is essential since a longer one has a higher opportunity cost compared to others.
In contrast to this, the author also noted that another building block of ROI is its 'present value.' Compared to the future value, which could include the opportunity costs, the present value is today, considering other factors like the "required rate of return" or the "hurdle rate." Additionally, the authors also noted that consideration should be made regarding the 'cost of capital,' which includes the risks and interests associated with a loan. Thus, a capital expenditure, which requires a loan, is significantly riskier if such a loan has a higher interest rate compared to others. These considerations are usually what a manager and an investor look for in determ...