nterpolate on Figure A2.7, but the line crosses the horizontal axis at the IRR = 10.2 %. Using the IRR function of Microsoft Excel, the internal rate of return is calculated instantly as 10.27 %. If this rate of return exceeds the weighted average cost of capital for the company, then the investment is assessed as favourable. Otherwise, the investment is not regarded as economic. Graphical method for IRR Discount rate Figure A2.7 Interpolation of internal rate of return, IRR Appendix 2: Financial Calculations BUSINESS PERFORMANCE MEASURES In this chapter some financial measurements are accounted for. Note that there are other important performance measures that are non-financial, e.g. customer satisfaction mea- surements, people satisfaction measurements, efficiency, quality and time measurements, innovation measures etc. Return on Investment (ROI) The relationship between profit and money invested in a project or company, usually expressed as a percentage, ROI, is also called the accounting rate of return (ARR). ROI is normally used when evaluating a company or organization and ARR is used when evaluating an investment or a project. Differences can occur: e.g. in some calculations the net profit is the numerator and the total assets are the denominators. Result (profit) * 100 ROI = Invested capital Return on Capital Employed (ROCE) Profit shown as a percentage of the capital in a business. Capital employed = Current assets - Short-term liabilities Result (profit) * 100 ROCE = Capital employed (from the balance sheet) See also Figure A2.8. ROI/ROCE can often provide more insight into performance when it is divided into the following components. Du Pont Model Revenues Operating profit Operating profit Total assets Revenues Total assets This approach is widely known as the Du Pont method of profitability analysis, which recognizes that there are two basic ingredients in profit making: using assets to generate more revenue, and increase income per unit revenue. An improvement in either ingredient without changing th