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.
Key point: ROI is a useful first filter for comparing investment options, but it is only as reliable as the profit forecast behind it – an optimistic $90,000 estimate that turns out to be $60,000 would drop the ROI to just 10%, below the required return.
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.
