Question

If the estimated lifetime benefit of a system is $870,000 and the estimated lifetime cost of the system is $550,000.

1. What is the estimated lifetime Return On Investment (ROI)?

(First, state the formula).

2. What is the annual percentage of the ROI if the estimated cost/benefit is for 4 years duration?

    c.      What is the real annual cash value of the system?

Answer 1

1. Estimated lifetime Return on Investment (ROI)

ROI= (Net Return on Investment ÷ Cost of Investment) × 100%

                Net return of investment = Final Value of Investment − Initial Value of Investment

                Net return of investment = $8,70,000 – $5,50,000 = $3,20,000

ROI = ($3,20,000 ÷ $5,50,000) × 100 = 58.18%

2. A) The annual percentage of the ROI if the estimated cost/benefit is for 4 years duration

Annualized ROI = [(1+ROI)1/n − 1] × 100%

Annualized ROI = [(1+0.5818)1/4 − 1] × 100% = 12.15 %

             C) The annual percentage of the ROI if the estimated cost/benefit is for 4 years duration

Real annual cash value = lifetime benefit x R x (1+R)n/[(1+R)n-1]

                                            = $8,70,000 x 0.1215 x (1+0.1215)4 ÷ [(1+0.1215)4 -1] = $2,87,321