Tom and Lynda have approached you for clarification regarding how to compute return on investment. They inform you that their operating profit is $125,000 per year. Their accountant’s statement contained a calculation of ROI based on $900,000, the net book value of their investment in Hercules. However, Tom feels that net book value is a poor measure of their return. He argues that it will take at least $1,250,000 to replace their machines and that estimate is better for figuring out what they have vested in the business. Lynda argues that even that estimate is too low. She says that they can sell the gym for about $1.7 million, mostly because the land has appreciated a great deal in their neighborhood.

Required:
Calculate the ROI for Hercules using the three estimates for investment. Which measure do you support? If different measures are useful for differing decisions, identify a context for each of the three values of ROI.