How to do this ROI calculation

Question

The client wants to invest $5M in a business to get a ROI of 50% over 5 years. This means the client needs an additional operating profit of $12.5M/year to make this investment worth pursuing ..this number was obtained by doing ($5M x1.5- $5M).. why are we multiplying $5M by 1.5 and subtracting 5M? Could someone explain the formula used here?

Answer 1

Hi there,

I believe you mean 12.5M total, not per year, and 50% ROI per year.

If that’s the case, given the ROI should be 50% of the investment, the yearly return needed is going to be 5*0,5=2.5 (given ROI = Net Profit / Investment).

Given the period is 5 years, the total is 2.5*5=$12,5M.

Hope this helps,

Francesco

Answer 2

Hi there,

Did you mean to say $1.25M/year instead of $12.5M.

If you can, can you provide a link to the case or a screenshot of the prompt? Your explanation/question is a bit hard to parse through.

Answer 3

not sure if I fully understood the prompt:

you'd need 50% ROI, which is 2.5M/year (5 X 0.5)

in 5y time, you'd eventually generate 12.5M of operating profit to beat the clients investment benchmark (5 X 2.5)

Answer 4

Am I the only one who got the goal as 2.5M over 5 years, which means they need to get profit 500k/year?