Saturday, 29 January 2011

Return on Investment / Simple pay back

These two terms get at the same concept. The former is more sophisticated and necessary in the accounting / financial world. The latter is simpler, more rule of thumb, but easier to calculate.

The idea of RoI, put simply, is to ask, when considering a non financial investment, whether you can make more money over the same period by putting the same capital into a financial investment.

For instance, if you were to spent (say) £2K double glazing your home, you would have to (by this principle) check whether the money you didn't get investing the £2K in a financial product is more or less than you will save in energy bills.

That all makes financial sense, but it ignores the carrying capacity of the earth, or natural capital to put it another way. If we fail to conserve finite natural resources, we as a planet will run out of them sooner, and all the money in the world can't buy us more. Like everything else, the usefulness of money is contingent on us having a planet to live on that can sustain our lives. That always has to come first.

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