To determine the correct formula for calculating the return on investment (ROI), let's analyze each of the provided options:
1. Cash flow: This represents the amount of cash that is generated and can be used for investment, expenses, or savings. When calculating ROI, it is the return or profit from the investment.
2. Effective operating income: This refers to the income from operations after accounting for expenses such as cost of goods sold, operating expenses, and depreciation. It is not typically used directly to calculate ROI.
3. Gross operating income: This is the income from operations before accounting for operating expenses and depreciation. It also is not directly used in ROI calculations.
4. Principal payment and interest: These are payments made to reduce a loan's principal balance or to pay interest on a loan. They are not used in calculating ROI.
Based on this analysis, the correct element used in the formula for calculating ROI is:
Cash flow divided by the initial cash investment.
Therefore, the correct answer is:
Cash flow
