Recently a student stated that the best (optimum) choice of
investment was always the choice with the largest ROI. Is this really the case? ROI is a statement of fact about an
investment, but is it always the best basis on which to make a choice? Simply saying we choose A over B because A
has a higher ROI may be correct but is also fraught with potential pitfalls.

Consider an example: If A and B have the same investment, then choosing the higher ROI is always appropriate. However, suppose I have ﹩1M in a box. If I do nothing with the box, it will still have ﹩1M in it 1 year from now (i.e., ROI = 0). Suppose I have the following two (and only two) options:

Consider an example: If A and B have the same investment, then choosing the higher ROI is always appropriate. However, suppose I have ﹩1M in a box. If I do nothing with the box, it will still have ﹩1M in it 1 year from now (i.e., ROI = 0). Suppose I have the following two (and only two) options:

- Take only ﹩1 from the box and invest it in something (leave the other ﹩999,999 in the box). At the end of the year I will get ﹩2 back on my investment. ROI is 1 (or 100%) on this investment.
- Take the whole ﹩1M and invest it in something. At the end of the year I will get ﹩1.3M back. ROI is 0.3 (or 30%) on this investment.

Which is better? Obviously the second option, but it has a
lower ROI, why? There is a fallacy here,
in reality, I have led you astray by incorrectly calculating the ROI of the
first case. In the first case the entire ﹩1M is effectively invested, not just ﹩1, (﹩1 to the investment and ﹩999,999 stays in the box).

The correct calculation is:

*Investment*= ﹩1M,*Return*= ﹩1,000,001, ROI = 1x10^{-6}*Investment*= ﹩1M,*Return*= ﹩1,300,000, ROI = 0.3

So, choosing case 2 (the higher ROI) would, in fact, be the best choice - just make sure you calculate the ROI consistently when you compare the two cases.

**Net Return**
An alternative (and possibly more appropriate) treatment of this case would be to determine the net return (or net present value). Net return =
gross return – investment. ROI is not
the same as net return. The optimum from an accounting point of view means maximizing the net return, not the ROI. The optimum is going to be
the case that maximizes the return less the investment (i.e., the net return). Calculating the net return for these two cases
gives:

- ﹩1,000,001-﹩1,000,000 = ﹩1
- ﹩1,300,000-﹩1,000,000 = ﹩300,000

Maximizing the ratio of market value-to-invested capital (ROI), is not the same thing as maximizing the difference between market value and invested capital (the net return).