Return on Investment Case Study

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Return on Investment case study

Table of Contents
INTRODUCTION ................................................................................................................................. 2 Return On Investment ................................................................................................................... 3 PART 1............................................................................................................................................... 4 Comparison among Payback, ARR and NPV.................................................................................... 4 PART 2............................................................................................................................................... 6 Payback method ............................................................................................................................ 6 Accounting Rate of Return (ARR) ................................................................................................... 8 Net present Value (NPV)................................................................................................................ 9 PART 3............................................................................................................................................. 11 Project Selection for D& J ltd ....................................................................................................... 11 REFERENCE...................................................................................................................................... 12

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INTRODUCTION
Three different options are taken under consideration by D& J ltd to successfully choose a suitable project. These options are: Option A – No change to technology. Additional manufacturing test systems would be required however. Option B - System redesign to reduce cost, and offshore subcontract Option C - Full custom microelectronics design The financial data for those options are given below: Product Type Variant A Variant B Variant C Investment Year 1 Sales £50,000 £200,000 £500,000 1,000 1,400 2,500 Year 2 sales 1,200 2,000 3,000 Year 3 sales 1,200 2,400 3,500 Year 4 sales 600 2,400 3,500 Year 5 sales 0 2,400 3,500

Table 1: Sales per annum (units) The expected sales prices and profit margins are as follows: Variant A -£200, gross profit margin 35% Variant B -£180, gross profit margin 35% Variant C- £150, gross profit margin 40% As to progress with this financial data, it is necessary to calculate the annual profit. The expected annual profit for each variant can be computed using the following formula Profit per annum= Sales price*No of sales* Profit margin So computing annual profits for each variant we get this following table: Product Type Variant A Variant B Variant C Investment Profits (£) Year 1 Year 2 Year 3 £50,000 70,000 84,000 84,000 £200,000 88,200 126,000 151,200 £500,000 150,000 180,000 210,000 Table 2: Profits per annum

Year 4 42000 151,200 210,000

Year 5 0 151,200 210,000

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As this coursework is focused on Return on Investment Case study, so it is essential to understand the basic concept of ROI to evaluate overall calculations properly.

Return On Investment
The profit or loss resulting from an investment transaction, usually expressed as an a nnual percentage return. In terms of calculating ROI, the benefit /return of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. ROI= (Gain from investment – Cost of investment)/Cost of investment(2) Calculated ROI for Variant A ,B & C are given below : For Variant A, Gain from investment =70,000+84,000+84,000+42,000+0 =280000 Cost of investment= 50000 ROI for Variant A=( 280000-50000)/50000 =4.6 Similarly ROI for Variant B = (667800-200000)/200000 =2.339 Also, ROI for Variant C = (960000-500000)/500000 =0.92 In terms of Return on Investment there are various methods to compute...
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