Future Business Leaders of America (FBLA) Accounting Practice Test

What term describes the ratio of money earned on investment relative to the amount of the investment?

1. Return on Investment

2. Net Present Value

3. Cost-Benefit Analysis

4. Investment Yield

The correct answer is: Return on Investment

The term that describes the ratio of money earned on an investment relative to the amount of the investment is Return on Investment (ROI). This financial metric is widely used to evaluate the efficiency or profitability of an investment by comparing the net profit generated to the initial cost of the investment. It is expressed as a percentage and allows investors to assess how effectively their funds are being utilized to generate additional revenue. A higher ROI indicates a more effective investment, while a lower ROI suggests it may not be yielding sufficient returns relative to the amount invested. ROI is valuable because it provides a standardized measure that can be used to compare the performance of different investments, making it a fundamental concept in investment analysis and decision-making. In contrast, other terms presented do not directly measure this relationship: Net Present Value focuses on the projected future cash flows of an investment discounted back to their present value; Cost-Benefit Analysis assesses the total expected costs versus the total expected benefits of a project to determine its feasibility; and Investment Yield typically refers to the earnings generated from an investment as a percentage of the current price, which may not consider the initial investment amount in the same way as ROI does.