Ace the 2026 Certified Treasury Pro Test – Cash In on Your Future Brilliance!

Using ROI (Return on Investment) as a performance measure offers valuable insights, but it is essential to recognize its limitations. The assertion that ROI "does not consider the profit generated by a project" is inaccurate because ROI is fundamentally defined as a measure of the profitability of an investment. Specifically, it is calculated by comparing the net profit from the investment relative to the initial costs. This implies that ROI is directly concerned with how profit is derived from an investment.

In contrast, the other drawbacks highlight the potential pitfalls associated with relying solely on ROI for evaluating investment performance. For instance, when cash flows are not evenly distributed over time, ROI may improperly reflect the investment's effectiveness or lead to misconceptions about its performance. Additionally, ROI calculations typically do not incorporate a charge for the cost of capital, which can obscure the true return from an investment when capital costs are significant. Moreover, using ROI as a benchmark can result in the rejection of projects that have a positive Net Present Value (NPV), which indicates that the project adds economic value, even if the immediate ROI does not appear favorable.

Understanding these nuances allows treasury professionals to utilize ROI more effectively while also being aware of its constraints in investment decision-making contexts.