Cookie and Privacy Settings

This website uses cookies to enable essential functions like the user login and sessions. We also use cookies and third-party tools to improve your surfing experience on preplounge.com. You can choose to activate only essential cookies or all cookies. You can always change your preference in the cookie and privacy settings. This link can also be found in the footer of the site. If you need more information, please visit our privacy policy.

Data processing in the USA: By clicking on "I accept", you also consent, in accordance with article 49 paragraph 1 sentence 1 lit. GDPR, to your data being processed in the USA (by Google LLC, Facebook Inc., LinkedIn Inc., Stripe, Paypal).

Manage settings individually I accept
expert
Expert with best answer

Sibren

0 Meetings

2 Q&A Upvotes

USD 159 / Coaching

2

Return on investment for profits after investment

Hello everybody,

I have recently worked on the Desert City case in the Yale Casebook. The case involved a project with an initial investment of $110m and a yearly and constant profit of $22m. Is there a metric that allows me to say that we get a profit of 20% of our investment back each year similar to a return on investment but without having a discount rate?

Thanks for your help!

Hello everybody,

I have recently worked on the Desert City case in the Yale Casebook. The case involved a project with an initial investment of $110m and a yearly and constant profit of $22m. Is there a metric that allows me to say that we get a profit of 20% of our investment back each year similar to a return on investment but without having a discount rate?

Thanks for your help!

2 answers

  • Upvotes
  • Date ascending
  • Date descending
Best Answer
Book a coaching with Sibren

0 Meetings

2 Q&A Upvotes

USD 159 / Coaching

Dear Alexander,

I just went through the case as to be able to provide an answer.
From what I understand, you are looking for a metric to express the profit (22M) vs investment (110M) without having to use NPV.

For this particular case, I would say you could rely on basic "common sense", which is a key skill as consultant. Often you won't have the time to go for the nitty gritty analysis and will have to use some "common sense".

The client expects a payback period of 3 years. Let's just ignore the discounting for this:

  • Given the profit of 22M, the payback period without discounting would be 110M/22M = 5 years
  • Given discounting will make the future profits lower today (dividing by (1+WACC)^years), the real payback period will be even longer
  • Therefore, the client should not progress with this project

I truly hope this is of any help to you!

Kind regards,
Sibren

Dear Alexander,

I just went through the case as to be able to provide an answer.
From what I understand, you are looking for a metric to express the profit (22M) vs investment (110M) without having to use NPV.

For this particular case, I would say you could rely on basic "common sense", which is a key skill as consultant. Often you won't have the time to go for the nitty gritty analysis and will have to use some "common sense".

The client expects a payback period of 3 years. Let's just ignore the discounting for this:

  • Given the profit of 22M, the payback period without discounting would be 110M/22M = 5 years
  • Given discounting will make the future profits lower today (dividing by (1+WACC)^years), the real payback period will be even longer
  • Therefore, the client should not progress with this project

I truly hope this is of any help to you!

Kind regards,
Sibren

Not sure I understand your question, beause the way I interpret it is trivial: we generate a Yearly RoI of 20%. The Total RoI is [Yearly RoI] x [Number of Years].

Cheers, Sidi

Not sure I understand your question, beause the way I interpret it is trivial: we generate a Yearly RoI of 20%. The Total RoI is [Yearly RoI] x [Number of Years].

Cheers, Sidi

Related case(s)

Airline Economics

Solved 16.3k times
Airline Economics We are an airline major operating out of India. We want to increase the number of passengers on all our flights. Could you please calculate the financial return of adding one more passenger per flight?
4.3 5 768
| Rating: (4.3 / 5.0)

We are an airline major operating out of India. We want to increase the number of passengers on all our flights. Could you please calculate the financial return of adding one more passenger per flight? Open whole case

Similar questions

No similar questions available