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What is wrong with the use of ROI

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Question - Evaluating a New Product - An Italian wholesaler of Mexican crafts is considering the importing of rugs. The rugs are hand-woven in southern Mexico and use natural dyes. The rugs cost an average of €250 including transportation and handling. The wholesaler plans to sell them in Italy for €300. Therefore, the profit per rug should be €50. The wholesaler's cost of capital is 10 percent annually. The wholesaler estimates an ROI on the project of €50/€250 or 20 percent. The residual income is estimated to be €50 - (10% × €250), or €25 per rug. What is wrong with the use of ROI and residual income in this analysis?

Reference no: EM132899458

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