How is the rate of return viewed by investors compared to finance managers?

The rate of return is viewed differently by investors and finance managers due to their distinct perspectives and objectives.

Investors view the rate of return primarily as a benefit. It represents the return they earn on their investments, reflecting the income generated through dividends, interest, and capital gains. Therefore, a higher rate of return is desirable for investors, as it indicates their investment is performing well and generating value.

Conversely, finance managers see the rate of return as a cost. Their role involves making decisions to allocate capital efficiently and ensure that any projects or investments undertaken achieve returns that meet or exceed a certain threshold, often referred to as the required rate of return or the cost of capital. If an investment doesn't reach this required return, it represents a cost to the company, as it could have deployed resources in a more productive manner.

This distinction illustrates the contrasting priorities of these two groups: investors seek to maximize their returns, while finance managers aim to ensure that the investments made by the organization achieve satisfactory performance relative to the risks involved. Understanding this difference is crucial for both effective investment strategy and corporate finance decision-making.