Calculating return on investment is an effective way to compare?

• A. The desirability of different ways of spending.
• B. The risk of project failure.
• C. The accuracy of financial statements.
• D. The efficiency of tax planning.

Answer: (A)

Return on investment is about how efficiently money is turned into gains, so it lets you compare different ways of spending resources on a like-for-like basis. By expressing net gain relative to the cost, ROI shows which option delivers more value per dollar spent. For example, if one option costs $10,000 and yields a $2,000 net gain, its ROI is 20%. If another costs $25,000 and yields a $10,000 net gain, its ROI is 40%. Even though the second option brings more total dollars, it also requires more investment, and the higher ROI means it provides more return per dollar spent, making it the more desirable choice when comparing spending options. ROI isn’t a measure of risk, it doesn’t assess the accuracy of financial statements, and it doesn’t directly measure the efficiency of tax planning.