Final answer:
Return on investment (ROI) is a measure of profitability, comparing net gains from an investment to the initial cost. Energy Returned on Energy Invested (EROEI) is similar for energy sources, expressing the ratio of the energy output over lifetime relative to initial energy input. Investors factor both ROI and risks into their investment decisions, shifting capital towards investments with better expected outcomes.
Step-by-step explanation:
A true statement regarding return on investment (ROI) is that it measures the profitability of an investment by comparing the benefit received to the cost incurred. Specifically, ROI is calculated by dividing the net gain from the investment by the initial cost of the investment. By analyzing the ROI, investors can assess the efficiency of various investments and make informed decisions about where to allocate their capital. A high ROI signifies a high return relative to the investment's cost.
In the context of energy investments, the concept of Energy Returned on Energy Invested (EROEI) also helps in evaluating the profitability of an energy source. As an example, a 9:1 EROEI means that for every unit of energy invested, 9 units were produced, leaving a net gain of 8 units, indicating a high return on the initial energy investment. If the EROEI is 1:1, it means the investment is only breaking even, offering no net energy benefit. Therefore, EROEI can be used as an approximate guideline to estimate the long-term viability and profitability of energy projects, and the up-front energy investment plays a significant role in determining the EROEI.
Investors looking at various financial investments will consider not only the rates of return but also the associated risks. If an investment becomes riskier or the return diminishes, investors may shift their capital to a more favorable opportunity, impacting the supply and demand for financial capital within those investments.