By what criterion should an investment policy be judged? One important criterion is the rate of return on investment. What is meant by the rate of return on the investment and why is such a figure important?
The rate of return on investment is comparable to the interest rate which must be paid on a loan.
Formally it is the rate of interest which ensures that the present value of the net benefits of an investment are zero. Usually the more profitable is the investment, the more a given dollar raises future income, the higher is the rate of return.5 If there is 1 dollar to invest it makes sense to invest it in the activity which generates most income. Rates of return calculations simply tell us where the money goes furthest. Put that way it may sound rather obvious that we should look at rates of return. It one sense it is, but the problems arise because measuring rates of return is difficult.
Difficulties arise, firstly, because rates of return calculations inevitably involve assessments about the future which is uncertain. Secondly, private and social rates of return may differ. From the point of view of society as a whole it is the social rate of return which matters and that is particularly hard to measure. Arguments which see the key to growth in investment in human capital are essentially arguing that social rates of return on such investment are high. In particular they are arguing that such social returns are higher than private ones and that private markets are likely to invest too little in education.
Human Capital and Economic Development Simon Appleton and Francis Teal
To learn more about this author, visit African Development Bank's Website.
Like this article? Share it with your friends
 |
Related Businesses - Evan Elite Authors |
|
The Evan Elite Authors program is currently in beta phase. For details please contact us.
|
|
|
African Development Bank
(Visit African's Website)
The African Development Bank is the
premier financial development institution
of Africa, dedicated to combating poverty
and improving the lives of people of the
continent and engaged in the task of
mobilizing resources towards the economic
and social progress of its Regional Member
Countries.The Bank’s s mission is to
promote economic and social development
through loans, equity investments, and
technical assistance.
The ADB is a multilateral development bank
whose shareholders include 53 African
countries and 24 non-African countries
from the Americas, Asia, and Europe. It
was established in 1964, with its
headquarters in Abidjan, Côte d’Ivoire,
and officially began operations in 1967.
|
|
|
African Development Bank's
Complete
List Of
African-Accounts
Articles
|
|
If you enjoyed this article, get African Development Bank's Complete List of African-Accounts Articles For FREE!
|
|
|
|
![[Get Copyright Permissions]](http://license.icopyright.net/images/icopy-w.gif){kind=small}
