Return on investment for profits after investment

financial return
Recent activity on Apr 11, 2019
2 Answers
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Alexander asked on Apr 08, 2019

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!

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Sibren
Expert
replied on Apr 11, 2019
Arthur D. Little Consultant | Coached 150+ cases | Created 10+ cases | Multiple offers

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

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Sidi
Expert
replied on Apr 08, 2019
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers

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

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Sibren gave the best answer

Sibren

Arthur D. Little Consultant | Coached 150+ cases | Created 10+ cases | Multiple offers
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