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19 September, 13:54

What is the ROI of a project that requires investments of $500 in each of the first 3 years and yields an income of $120, $85, and $35 in each of the first 3 years?

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  1. 19 September, 14:21
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    The ROI = 16%

    Explanation:

    The Return on investment or ROI is the ratio of the amount made as profit on an investment to the cost of the investment. It is the measure of the efficiency of an investment.

    To calculate the ROI, we have to calculate the total benefits gotten on divide it by the total cost incurred in the investment. It is expressed in percentage

    The formula is written as;

    ROI = (present value of the investment - cost of the investment) : cost of the investment

    Remember that (present value of the investment - cost of the investment) is the benefit gotten on the amount invested;

    current value of investment = $500 invested for each of the three years + $120 + $85 + $120

    = $500 + $500 + $500 + $120 + $85 + $35 = $1,740

    Cost of investment = $500 + $500 + $500 = ($1,500) because $500 was invested three times.

    ∴ ROI = (1,740 - 1500) : 1500 = 240 : 1500 = 0.16

    converting to percentage, 0.16 = 16%.
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