Question

Calculate the return on investment (ROI) for the following five projects, total cost includes the initial investment. Which projects should be invested in if the organization has a spending constraint of $7,000,000 and its cost of capital is 6%?

                   Total       Total  

Project       Investment      Revenue      Cost       Profit      ROI

A       $3,000,000   $5,500,000   $5,000,000   _____   _____

B       $2,400,000   $4,000,000   $3,800,000   _____   _____

C        $1,350,000   $2,400,000   $2,300,000   _____   _____

D       $1,500,000   $3,200,000   $3,000,000   _____   _____

E       $2,000,000   $3,800,000   $3,700,000   _____   _____

Answer 1

	Profit	ROI	Ranking
	Total revenue -cost	Profit /Total investment
A	5500000-5000000=500000	500000/3000000= .1667 or 16.67%	1
B	4000000-3800000=200000	200000/2400000= .0833 or 8.33%	3
C	2400000-2300000=100000	100000/1350000=.0741 or 7.41%	4
D	3200000-3000000=200000	200000/1500000=.1333 or13.33%	2
E	3800000-3700000=100000	100000/2000000=.05 or5%	5

Since Project A has highest ROI then it should be selected first (3,000,000) then project D (1,500,000) and project B (2,400,000) .Total Invetment : 6,900,000

since there is a constraint of 7,000,000 ,project C cannot be undertaken .Project E cannot be accepted as its ROI is less than cost of capital