what is the significance of ROI

No method is ideal as all are flawed and have inherent weaknesses. Most financial managers use 3 or 4 methods to try to reach a decision about the viability of project. Breifly these are:

1. Pay back period: It takes the future net cash inflows to recovers initially cash outflow/ investment. The major flaw is that this dose not takes into account the cash flows after the recovery of initial outflows. Here the main focus is on recovery of initial investment.

2.  ROI is the ratio is Average annual profits to average capital investment. Though it is easy to understand but it ignores cash flows (used profits EBIT or PAT), ignores time value of money and dose not take into account size and life of the investment. 

3. Net present Value (NPV): This is the difference between the present values of future cash inflows and PV of future cash outflows, discounted at the firm's cost if capital. Here, cost of capital is another difficult think to calculate/ predict.

4. IRR is the discount rate, which equates the PV of he expected initial cash outlays with the PV of the expected cash inflows. If IRR is greater than cost of capital (uh! Again) the the project should be expected. Also at times a project may have NIL or multiple IRR. 

There are many other derivatives of above 4 methods of calculating returns on investments but none is without their set of limitations.

So, any result, from above, should be viewed after understanding weakness/ limitations.

Regards,

Ashutosh Rai

ROI is better and more populary used method rather than IRR

I feel ROI takes in to account the return for specific period which IRR does not..

ROI needs the total Future Cash Inflow analysis of with their present values with specific Rate of Discounting... as IRR does not...

Whats ur view??