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Investment Value Added Measures

Investment value added measures provide a way to assess the financial performance of investments, taking into account the initial investment, cash flows generated by the investment, and the returns on investment. These metrics help investors evaluate the effectiveness of their investment strategies, allowing for informed decisions about future investments.

Measuring Return on Investment (ROI)​

Return on investment is a simple yet effective way to measure the value added by an investment. It calculates the net gain or loss generated by an investment as a percentage of its initial cost. This metric provides a straightforward view of whether an investment has generated a positive or negative return, making it easy to compare with other investments.

Benefits and Limitations​

The benefits of using ROI include:

  • Easy calculation: ROI is calculated by dividing net gain by the initial investment and multiplying by 100.
  • Comparability: It allows for comparison between different investments, making it easier to identify the most profitable ones.
  • Time-efficiency: Calculating ROI takes minimal time and effort.

However, ROI has its limitations:

  • Does not consider cash flows over time
  • Ignores the timing of gains and losses
  • May not account for changes in investment value