Entrepreneurship and Small Business (ESB) V2 Certification Practice Exam

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What is the formula used to calculate ROI?

(Value of investment - cost of investment) / cost of investment * 100
(Net profit / total revenue) * 100
(Total revenue - total costs) / total costs * 100
(Gross income - expenses) / total investment * 100

The correct answer is: (Value of investment - cost of investment) / cost of investment * 100

The formula for calculating Return on Investment (ROI) reflects the efficiency or profitability of an investment. This metric is crucial for entrepreneurs and business managers as it helps them assess how well they are utilizing their capital to generate profits. The formula specifically looks at the difference between the value of the investment and the cost of that investment, which determines the net gain from the investment. By taking this net gain and dividing it by the original cost of the investment, you effectively gauge the return relative to what was initially spent. Multiplying by 100 converts this ratio into a percentage, making it easier to interpret and compare against other investment opportunities. This approach provides a straightforward metric that can assist entrepreneurs in making informed decisions about where to allocate their resources for the best possible returns. The other options, while they involve financial metrics, do not align with the standard definition of ROI. They focus on different aspects of financial performance, such as profit margins, revenue comparisons, or cost structures, which serve distinct purposes but do not directly measure the return on a specific investment.