125% ROI after Year 1

Question

I'm confused on how this question obtained the calculation of 125% ROI post-year 1 after the initial cost (non-reoccuring) of purchasing the licences at 125M.

I am aware that the total profit each year is 31.2 M, and taking the final answer of 125%, this implies an initial cost of 13.86 M that is being used as the basis of cost in this ROI calculation.

However, I can't locate this number accordingly and would like to seek some advice.

Note: the costs available to us are as follows:

Payroll costs = 158.8 M (variable cost, not part of initial cost)
Operating costs = 2.5 M
Total licence costs = 125 M (already accounted for, not re-occuring).

Help would be appreciated!

Answer 1

Dear,

Thank you for your question. Please note that your annual recurring profit is not $31.2 million (it's only for the first year); instead, starting from Year 2 onwards, total recurring profits amount to $156.2 million.

Profit in Year 1 is calculated as follows: Total Revenues - Operating Costs - Initial Investment (Licenses) = $317.5 million - $161.3 million - $125 million = $31.2 million.

However, starting from Year 2, your profit is calculated as: Total Revenue - Operating Costs = $317.5 million - $161.3 million = $156.2 million.

In Year 1, your return on investment (ROI) is lower at 25% because you are using a portion of your profits to cover the initial investment of $125 million in licenses. However, in the subsequent years, this expense will no longer be applicable as it is a one-time cost (i.e. you pay for them only once and repay them in Year 1). Theoretically, at Year 2 the ROI will be Tot. Profits/ Initial Investment → $156.2M / $125M = 125%

I hope this clarification helps. Please don't hesitate to reach out if you have any further questions.

Best regards,

Antonio