Business – 10.3 Investment appraisal – Investment appraisal decisions | e-Consult
10.3 Investment appraisal – Investment appraisal decisions (1 questions)
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Answer:
- ROI = (Total profit over life – Initial cost) ÷ Initial cost × 100
- Total profit = £75,000 × 5 = £375,000
- ROI = (£375,000 – £250,000) ÷ £250,000 × 100 = £125,000 ÷ £250,000 × 100 = 50 %
- Payback Period = Initial cost ÷ Annual profit = £250,000 ÷ £75,000 ≈ 3.33 years
Interpretation:
- An ROI of 50 % indicates a strong return relative to the capital outlay.
- A payback period of just over 3 years is well within the 5‑year useful life, leaving roughly 1.7 years of profit after recovery.
Conclusion: The investment is financially attractive and would likely be approved.