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

by admin on Apr.11, 2010, under Other - Business & Finance


e.g if I buy an equipment/asset for $20M
Net profit
Year 1 = $3M
Year 2 = $4M
Year 3= $5M
Year 4 =$6M
Year 5 = $7M
Year 6 = equipment is sold for $18M
Included in the above net profit is a yearly depreciation of $2M/year

How do I calculate the ROI on this asset?

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1 Comment for this entry

  • Marc
    April 14th, 2010 on 8:49 am

    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.

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