Jason Kemp was torn between conflicting emotions. On the one hand, things were going so well. He had just completed 6 months as the assistant
Jason: Mel, I’ve gone over the figures for the new project and can’t find any way to get the income above $1.9 million. The salespeople have given me the most likely revenue figures, and production feels that the expense figures are solid.
Mel: Jason, those figures are just projections. Sales doesn’t really know what the revenue will be. In fact, when I talked with Sue Harris, our sales vice president, she said that sales could range from $1.5 million to $2.5 million. Use the higher figure. I’m sure this product will justify our confidence in it!
Jason: I know the range of sales was that broad, but Sue felt the $2.5 million estimate was pretty unlikely. She thought that during the first 5 years or so that ZM sales would stay in the lower end of the range.
Mel: Again, Sue doesn’t know for sure. She’s just estimating. Let’s go with the higher estimate. We really need this product to expand our line and to give our division a chance to qualify for sales-based bonuses. If ZM sells at all, our revenue will go up, and we’ll all share in the bonus pool!
Jason: I don’t know, Mel. I feel pretty bad signing off on ROI projections that I have so little confidence in.
Mel: (frustrated) Look, Jason, just prepare the report. I’ll back you up.
1) What is the ROI of project ZM based on the initial estimates? What would ROI be if the income rose to $2.34 million?
According to the initial estimates by Sue Harris, Sales vice president, Sales may range from $1.5 million to $2.5 million, he/she also felt that $2.5 million in sales in the initial years are very unlikely and Sales will remain at the lower end of the range i.e.$1.5 million per year for the next 5 years.
So ROI = Return(benefit)/investment(cost) *100
Here Return(Benefit) = $1.5 Million
Investment (Cost) = $15.6 Million
Hence we put the values in the above ROI formulae
Then,
= $1.5 million/ $15.6 million *100
=0.096 *100
= 9.6%.
Here ROI is 9.6%
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