ROI and Profitability Index: A Note on Managerial Performance

14 Pages Posted: 10 Jan 2015 Last revised: 2 Nov 2023

See all articles by Carlo Alberto Magni

Carlo Alberto Magni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering)

Date Written: January 8, 2015

Abstract

This note deals with the simplified case of a principal (e.g., a firm's board of directors) which delegates execution of an economic activity to a business unit (or a subsidiary firm) managed by a manager. It is assumed that the manager has no control over the cash flows injected into the unit or withdrawn from it: such decisions are made by the principal. The principal aims at measuring the manager's performance in a given interval of time. Neither the net present value (NPV) nor its companion net terminal value (NTV) are appropriate measures for this purpose, because they depend on the cash flows injected and withdrawn by the principal. We introduce the manager's profitability index (MPI), which is invariant under changes in the cash flows, so neutralizing the effect on value creation of the principal's decisions. We also break down the project's NTV into two components, which measure the manager's contribution and the principal's contribution to value creation.

UPDATED VERSION: OCTOBER 31 2023

Keywords: Finance, economic performance, profitability index, Return On Investment, manager.

JEL Classification: J33, M41, G31, E22, O16

Suggested Citation

Magni, Carlo Alberto, ROI and Profitability Index: A Note on Managerial Performance (January 8, 2015). Available at SSRN: https://ssrn.com/abstract=2546917 or http://dx.doi.org/10.2139/ssrn.2546917

Carlo Alberto Magni (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering) ( email )

Italy

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