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Cutting Edge Sensors Ltd. has taken $2.5M worth of investor stock to start a 3-year project that is estimated to earn $5M by the end of the project ($2M at the end of year 2, and $3M at the end of year 3). The yearly costs involved are $500,000 for the length of the project. Investors had the opportunity to invest in another project expected to earn 10% per year.

What is the ROI? (format: xx.x e.g. 99.9 or −99.9)

Answer :

The ROI for the project is 503.96%, which means the project is expected to generate a return of more than 5 times the investment.

To calculate the ROI (Return on Investment) for Cutting Edge Sensors Ltd., we need to compare the earnings from the project with the opportunity cost of investing in the alternative project.

The project is estimated to earn 5 million by the end of the 3 years. This includes 2 million at the end of year 2 and 3 million at the end of year 3. The yearly costs involved are 500,000 for the entire project duration.

First, let's calculate the total earnings from the project:
Year 1: 0 (no earnings)
Year 2: 2 million
Year 3: 3 million
Total earnings: 2 million + 3 million = 5 million

Now, let's calculate the opportunity cost of investing in the alternative project. The investors had the opportunity to earn 10% per year. Since the project duration is 3 years, we'll compound the earnings annually:
Year 1: 2.5 million x 10% = 250,000
Year 2: 2.75 million x 10% = 275,000
Year 3: 3.025 million x 10% = 302,500

Total opportunity cost: 250,000 + 275,000 + 302,500 = 827,500

Finally, let's calculate the ROI:
ROI = (Total earnings - Total opportunity cost) / Total opportunity cost x 100%
ROI = (5 million - 827,500) / 827,500 x 100%
ROI = 4,172,500 / 827,500 x 100%
ROI = 503.96%

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