How do you calculate the return on investment of an asset?
Tuesday, November 10th, 2009 at
4:48 pm
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 calculate tһе ROI οח tһіѕ asset?
Tags: return, formula, return οח investment, calculate return οח investment, investment
Tagged with: Calculate Roi • Depreciation • Equipment Asset • Net Profit • Return Investment • return on investment • Year 1 • Year 6
Filed under: Investment
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First you add back the depreciation to find out the cash basis gain per year. The resulting 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 calculate 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 (again using Excel) using a discount rate of 29.107% and the result, predictably, came out to equal the initial $20M investment.
Overall, this would be a very profitable investment for the company.