0 Calculation of Return on Investments Farrokh Alemi, Ph.D.

1 Present Value

2 “Show Me the Cash” Interest rate or opportunity cost of investment Years before receivin g the cash

3 Example of Present Value If we assume a 6% interest rate, receiving $1,000 in 5 Years is worth $747 today. Interest rate Years till return

4 Calculation of Return on Investment

5 Calculation of Return on Investment in 3 Steps 1.Calculate present value of future returns

6 Calculation of Return on Investment in 3 Steps 1.Calculate present value of future returns 2.Calculate present value of investments

7 Calculation of Return on Investment in 3 Steps 1.Calculate present value of future returns 2.Calculate present value of investments 3.Take the ratio

8 Example Step 1: Present Value of IT Costs Year 1Year 2Year 3Year 4Year 5 Cost in 000$88,167$70,999$47,335$35,501$28,399 Present value?$83,176$63,188$39,743$28,120$21,221 Assume 6% Interest Rate or 0.06

9 Example Step 1: Present Value of IT Costs Year 1Year 2Year 3Year 4Year 5 Cost in 000$88,167$70,999$47,335$35,501$28,399 Present value?$83,176$63,188$39,743$28,120$21,221 Shows returns in each year

10 Example Step 1: Present Value of IT Costs Year 1Year 2Year 3Year 4Year 5 Cost in 000$88,167$70,999$47,335$35,501$28,399 Present value$83,176$63,188$39,743$28,120$21,221

11 Example Step 1: Present Value of IT Costs Year 1Year 2Year 3Year 4Year 5 Cost in 000$88,167$70,999$47,335$35,501$28,399 Present value$83,176$63,188$39,743$28,120$21,221

12 Example Step 1: Present Value of IT Costs Year 1Year 2Year 3Year 4Year 5 Cost in 000$88,167$70,999$47,335$35,501$28,399 Present value$83,176$63,188$39,743$28,120$21,221

13 Example Step 1: Present Value of IT Costs Year 1Year 2Year 3Year 4Year 5 Cost in 000$88,167$70,999$47,335$35,501$28,399 Present value$83,176$63,188$39,743$28,120$21,221

14 Example Step 1: Present Value of IT Costs Year 1Year 2Year 3Year 4Year 5 Cost in 000$88,167$70,999$47,335$35,501$28,399 Present value$83,176$63,188$39,743$28,120$21,221

15 Example Step 1: Present Value of IT Costs Year 1Year 2Year 3Year 4Year 5 Cost in 000$88,167$70,999$47,335$35,501$28,399 Present value$83,176$63,188$39,743$28,120$21,221

16 Example Step 1: Present Value of IT Costs Year 1Year 2Year 3Year 4Year 5 Cost in 000$88,167$70,999$47,335$35,501$28,399 Present value$83,176$63,188$39,743$28,120$21,221

17 Example Step 1: Present Value of IT Costs Present Value of 5-year Cost of Investment $235,450,000 Year 1Year 2Year 3Year 4Year 5 Cost in 000$88,167$70,999$47,335$35,501$28,399 Present value$83,176$63,188$39,743$28,120$21,221

18 Example Step 2: Present Value of Future Revenues Year 1Year 2Year 3Year 4Year 5Total $333,304,921$333,322,089$333,345,753$333,357,587$333,364,6891,666,695,037 Shows future returns

19 Example Step 2: Present Value of Future Revenues Year 1Year 2Year 3Year 4Year 5Total $333,304,921$333,322,089$333,345,753$333,357,587$333,364,6891,666,695,037

20 Example Step 2: Present Value of Future Revenues Year 1Year 2Year 3Year 4Year 5Total $333,304,921$333,322,089$333,345,753$333,357,587$333,364,6891,666,695, ,438,604

21 Example Step 2: Present Value of Future Revenues Year 1Year 2Year 3Year 4Year 5Total $333,304,921$333,322,089$333,345,753$333,357,587$333,364,6891,666,695, ,438,604

22 Example Step 2: Present Value of Future Revenues Year 1Year 2Year 3Year 4Year 5Total $333,304,921$333,322,089$333,345,753$333,357,587$333,364,6891,666,695, ,438,604296,655,472

23 Example Step 2: Present Value of Future Revenues Year 1Year 2Year 3Year 4Year 5Total $333,304,921$333,322,089$333,345,753$333,357,587$333,364,6891,666,695, ,438,604296,655,472279,883,522

24 Example Step 2: Present Value of Future Revenues Year 1Year 2Year 3Year 4Year 5Total $333,304,921$333,322,089$333,345,753$333,357,587$333,364,6891,666,695, ,438,604296,655,472279,883,522264,050,432

25 Example Step 2: Present Value of Future Revenues Year 1Year 2Year 3Year 4Year 5Total $333,304,921$333,322,089$333,345,753$333,357,587$333,364,6891,666,695, ,438,604296,655,472279,883,522264,050,432249,109,4881,404,137,518 Present Value of 5-Year Future Revenues = $1,404,137,518

26 Example Step 3: Return on Investment

27 Example Step 3: Return on Investment

28 Take Home Lesson Calculate ROI in 3 easy steps as the ratio of present value of returns over present value of investment