Small Business Approach Value Creation By Finding Out If There Is A Roi Number Essay

6788 WordsAug 16, 201528 Pages
Abstract This dissertation‘s aim is to help small business approach value creation by finding out if there is a ROI number that can give way to only positive IRRs. The present work explored on the relationship established by Ijiri in 1978, Salamon in 1982 and Stark in 1987 between the cash recovery rate and the economic profit. In essence, the deviations that occur between ROI and IRR are because of the timing of the returns and the time horizon of the project. To take this matter into account, a model that generates the outcomes of an investment project was created. The results that stem from this model were later graphed and analyzed, concluding that IRRs that come from single ROIs can be delimited, but this delimitation cannot be defined, since data seems to cluster as ROI gets bigger. Furthermore, when results are extrapolated it can be determined that there is no ROI figure that results in no negative IRRs. This suggests SMEs must be careful when evaluating projects solely by the return on the investment. Introduction 1.1 Background The creation of value is a vital activity to the success of a firm. Gabriel Hawawini and Claude Viallet rightfully argue in their book Finance for Executives: Managing for Value Creation (Hawawini & Viallet, 2011) that “Managers should manage their firm’s resources with the objective of increasing the firm’s value”. This is evident, as a value deficit will make the firm unable to attract equity capital to fund its projects (Hawawini &

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