125% ROI after Year 1

Question

I'm confused on how this question obtained the calculation of 125% ROI post-year 1 after the initial cost (non-reoccuring) of purchasing the licences at 125M.

I am aware that the total profit each year is 31.2 M, and taking the final answer of 125%, this implies an initial cost of 13.86 M that is being used as the basis of cost in this ROI calculation.

However, I can't locate this number accordingly and would like to seek some advice.

Note: the costs available to us are as follows:

Payroll costs = 158.8 M (variable cost, not part of initial cost)
Operating costs = 2.5 M
Total licence costs = 125 M (already accounted for, not re-occuring).

Help would be appreciated!

Answer 1

Dear,

Thank you for your question. Please note that your annual recurring profit is not $31.2 million (it's only for the first year); instead, starting from Year 2 onwards, total recurring profits amount to $156.2 million.

Profit in Year 1 is calculated as follows: Total Revenues - Operating Costs - Initial Investment (Licenses) = $317.5 million - $161.3 million - $125 million = $31.2 million.

However, starting from Year 2, your profit is calculated as: Total Revenue - Operating Costs = $317.5 million - $161.3 million = $156.2 million.

In Year 1, your return on investment (ROI) is lower at 25% because you are using a portion of your profits to cover the initial investment of $125 million in licenses. However, in the subsequent years, this expense will no longer be applicable as it is a one-time cost (i.e. you pay for them only once and repay them in Year 1). Theoretically, at Year 2 the ROI will be Tot. Profits/ Initial Investment → $156.2M / $125M = 125%

I hope this clarification helps. Please don't hesitate to reach out if you have any further questions.

Best regards,

Antonio

Answer 2

The main difference really is the risk at stake. Entrepreneurial Drive is more about having initiative and driving th... (read entire answer)

The main difference really is the risk at stake. Entrepreneurial Drive is more about having initiative and driving things forward, but Courageous Change is about making the hard... (read entire answer)