How to do this ROI calculation

ROI calculation
New answer on Jul 03, 2021
4 Answers
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Anonymous A asked on Jul 02, 2021

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?

(edited)

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Francesco
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replied on Jul 03, 2021
#1 Coach for Sessions (4.000+) | 1.500+ 5-Star Reviews | Proven Success (➡ InterviewOffers.com) | Ex BCG | 9Y+ Coaching

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

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Ian
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replied on Jul 03, 2021
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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.

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Anonymous C replied on Jul 03, 2021

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

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Anonymous B replied on Jul 03, 2021

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)

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Francesco gave the best answer

Francesco

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