ABSTRACT
W hen a sport organization makes an investment, it expects that the money invested today will earn more in the future. The gain or loss of an investment over a period of time is the rate of return. Measuring return allows the organization to know the financial performance of its investment. We can measure the return on any type of investment-from an investment in a new player to the
investment is in dollar terms. Dollar return is simply the result of subtracting the amount invested from the amount received:
However, this method of measuring return is problematic. First, the size or scale of the investment is important. Without knowing the size of the investment, we cannot meaningfully evaluate the sufficiency of the return. Second, the timing of the return is important (see the discussion of time value of money in Chapter 4). Hence, the preferred method is to calculate a measure called the rate of return, or percentage return, rather than dollar return. Rate of return corrects for differences in the scale of investments, and, when calculated on an annual basis, it also solves the timing problem. Rate of return is calculated as follows:
This formula standardizes the investment’s return by measuring the return per investment unit.
