How do you calculate the return on investment of an asset?

November 10th, 2009

e.g іf I bυу аח equipment/asset fοr M
Net profit
Year 1 = M
Year 2 = M
Year 3= M
Year 4 =M
Year 5 = M
Year 6 = equipment іѕ sold fοr M
Included іח tһе above net profit іѕ a yearly depreciation οf M/year

Hοw ԁο I assess tһе ROI οח tһіѕ asset?

Posted in Investment
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One Response to “How do you calculate the return on investment of an asset?”

  1. Comment by Marc
    November 10th, 2009

    First you add back the depreciation to find out the cash basis gain per year. The ensuing cash in and outflows would be:

    Year 0 = ($20M)
    Year 1 = $5M
    Year 2 = $6M
    Year 3= $7M
    Year 4 =$8M
    Year 5 = $9M
    Year 6 = $18M

    The cash Return on Investment is the sum of the cash in’s and out’s. In this case it adds up to $33M.

    The real question is "What is the Internal Rate of Return" (IRR) for this investment. To assess that, you solve for the IRR. I used Excel for that, using the IRR function. The result came to 29.107%.

    So this investment will return $33M over the 6 years and provide a rate of return of 29.107%.

    I double checked the IRR calculation by calculating the Net Present Value (NPV) of that same series of cash inflows (over again using Excel) using a discount rate of 29.107% and the result, predictably, came out to copy the initial $20M investment.

    Overall, this would be a very profitable investment for the company.