Answer – Return On Investment (ROI)

• Lesson
• Exercise
• Answer

This is the suggested answer to the Return on Investment exercise on Colorado Ricardo Mountain Bikes.

Calculating ROI

ROI = (Annual return / Cost of investment) x 100 = ($90,000 / $600,000) x 100 = 15%.

The Recommendation

At 15%, the e-mountain-bike investment clears Colorado Ricardo’s 12% minimum required return, so on these figures alone it is worth pursuing. Ricardo should still weigh this against the supplier and skills risks raised elsewhere – the return looks attractive only if the investment actually delivers the extra $90,000 of profit as forecast.

This calculation gives a concrete number to the Product Development option raised in the Ansoff’s Matrix exercise, and depends on the cost accuracy discussed in the Activity-Based Costing exercise.