ROI Project
Review of Historical Roots Returns On Investment (ROI)
The model was for the first time applied in DuPont Gun Powder Company that is located in Wilmington Delaware. ROI was created in the beginning of twentieth century by Donaldson Brown who joined DuPont in 1909 as a salesperson who was to sell explosives and not to handle financial issues or deal with any mathematics formula company. The model was applied first when Donaldson was requested by the company’s executive to submit a report of which he applied return on Investment formula back in the year 1912. The company’s treasurer noticed the desire and acumen that Donaldson had in the field of finance and recommended him to develop uniform accounting procedures and other financial standards which were to be applied by division managers of DuPont Company when evaluating performance. Additionally, the treasure also encouraged him to prepare statistical formulas to measure the entire performance of the company (Otley, & Emmanuel 2013).
The creation and successful results obtained from using Return on Investment Model was a great achievement for DuPont Company since the company used to invest in almost any venture. For instance the company used to make gunpowder which was the main objective of incorporation and used capital from France, made different chemicals like Lacquers, cellulose and other components. In the year 1912, the company wanted to expand its market and hence benefit for advantages of the market of scale though diversification. The creation of wider customer base was through venturing in new products in Automobile Industry. This was before Donaldson joined the treasurer and finally becoming the member of executives staffs in General Motors Company (Otley, & Emmanuel, 2013).
DuPont Gunpowder Company invested an amount which was more than $ 25 in year 1920 to make General Motors Company grow which it is currently among the world’s largest Automobile companies. When Donaldson took over the treasurer’s office, he brought about application of statistics and economics formula one of them being ROI which enabled the company make high returns and managed to acquire controlling interests in the weakening General Motors Company. During this time, the Brown was appointed as a vice president of finance in GM Company where he revived and recovered it in terms of financial positioning. In year 1923, Brown developed a model and brought forth technical aspects that allowed DuPont retain its controlling interest in General Motors Investment. In year 1924, Donaldson was appointed as a member of executive team at GM investment and in collaboration with the Company’s president he improved cost accounting skills and techniques that he had developed at DuPont of ROI. This principle of Return on Investment was hence forth widely applied in America and diffused worldwide in its application in field of finance and economics. Since then the ROI model has been applied in economics, financial management fields making investment decisions and determining the viability of a project in terms of riskiness and returns (Otley, & Emmanuel 2013).
Overview of ROI
Return on investment is a most commonly used method of evaluating the financial consequences of an individual investment hence determining their feasibility. The metric measures the benefit that an investors gain from investing their resources to a given project or an investment. ROI is determined by using the formula (ROI = {(investments gains -cot of investment)/Cost of investment}* 100. It measures the percentage of returns that an investor gains from investing in a project that generates positive net present values whereby high ROI is an indication of investment gains being favorable compared to the investments cost. ROI is used to determine earnings generated from an invested project in capital decisions. ROI uses cash flows to determine the difference in magnitude between the timing investments gain compared to costs or cash out lay for a specific project. Return on Investment Model has been applied widely over the past decades to evaluate capital decisions pertaining to acquisition of assets, programs, projects, initiatives, in venture capitals, and in investment decisions in the financial investments for instance, on shares (Baker, Benrud & Powell, 2005)
ROI originated as a result of company investing in other companies or through decentralization to increase their customer base and hence profitability. The investments are meant to increase the cash inflows to the company from both divisions and autonomous branches. As a management tool, ROI has widely been used in many decentralized companies and units. Even if ROI has been criticized as having a number of limitations for instance, inability to apply the model in making correct evaluations, it is the best available system in making investment decisions and evaluating projects feasibility and hence making decisions on whether to accept or reject the project. ROI has to a great extent raised the performances of division managers in most of the decentralized companies by evaluating their performance at a division level before preparing a group report. The Model enables the company when determining how the divisions have used the funds allocated and properties to generate profits. The managers of divisions are also in a position to utilize assets under their control in an optimal and most desirable way hence improving returns on outlays. The ROI is also used in business to evaluate and make decisions on whether to undertake or reject a project through analyzing the rate of returns in a given period of time. ROI is also used in evaluating projects in a given portfolio and hence compare their attractiveness in terms of returns on cash outflows and the one with the best ROI would be undertaken (Baker, Benrud & Powell, 2005)
Hard and Soft analysis
In implementation of IT in the hospital, return on investment analysis is of great important in that it is used in building a business case. Calculation of return on investments for clinical systems takes in to accounts both hard and soft analysis of the benefits. The soft benefits of the clinical invested system could include improved patient’s safety and also the quality that results from minimized misinterpretations of handwritten documents. Hard benefit of investment could include decreased length of days stayed in a hospital and the number of cases resulting from adverse drugs administered to patients. ROI computation in clinical systems is a bit complex, in health IT, return on investment involves comparing investments cost and revenue gains taking in to considerations savings that results from evading errors when administering drugs and improved efficiencies as a results of proper communication channels. Hard benefits are easily measured in terms of revenue generated which is contrary to soft which are difficult to express in terms of numbers. Hard benefits may take longer duration to regain revenue from investments while soft could take short duration to realize returns. For instance in case of hard benefits which could involve investment in extra number of beds in a hospital may necessitate high cash outlay which will require longer duration to recoup revenue gains while soft benefits like enhanced patient safety would be realized within a short period of time (Crawford & Pollack, 2004).
Return on Investments is a model that is most efficient to measure the feasibility of a project taking into considerations all the cost of investment, duration and gains as a result of accepting a given project. Decision makers should evaluate a given number of portfolios to determine one with high ROI which should be undertaken since the company would recoup high revenue within a short duration. ROI is an important management too that should also be used when evaluating divisions performances to determine their profitability depending on the returns on assets and properties invested (Baker, Benrud & Powell, 2005).
References
Baker, H. K, Benrud, E. & Powell, N. (2005). Understanding Financial Management. Hoboken, New Jersey: Blackwell Publishing.
Crawford, L. & Pollack, J. (2004). Hard and soft projects: a framework for analysis. International Journal of Project Management, 22(8), 645-653.
Otley, D. & Emmanuel, K. M. C. (2013). Readings in accounting for management control. Berlin, Heidelberg: Springer.