Mary invested K250,000 in a business that earned a profit of K2,250 during the past month as shown below. Mary believes the business will earn an annual profit equal to 12 times the monthly profit. Assume Mary wants to take K20,000 from the business each year for her personal use. Sales K 17,000 Less: Materials K 7,500 Insurance 1,500 Rent 2,000 Miscellaneous 950 Wages 2,800 14,750 Profit Earned K 2,250 Determine the business’s return on investment & return of investment.
Question
Mary invested K250,000 in a business that earned a profit of K2,250 during the past month as shown below. Mary believes the business will earn an annual profit equal to 12 times the monthly profit. Assume Mary wants to take K20,000 from the business each year for her personal use. Sales K 17,000 Less: Materials K 7,500 Insurance 1,500 Rent 2,000 Miscellaneous 950 Wages 2,800 14,750 Profit Earned K 2,250 Determine the business’s return on investment & return of investment.
Solution
To calculate the return on investment (ROI), we first need to determine the annual profit. According to the information given, the business makes a monthly profit of K2,250. If we multiply this by 12 (the number of months in a year), we get an annual profit of K27,000.
However, Mary wants to take K20,000 from the business each year for her personal use. So, the actual annual profit that gets reinvested into the business is K27,000 - K20,000 = K7,000.
The ROI is calculated as (Annual Profit / Initial Investment) * 100. In this case, it would be (K7,000 / K250,000) * 100 = 2.8%. This means that for every K1 invested, the business returns K0.028 in profit.
The return of investment is the time it will take for the investment to pay for itself. This is calculated as (Initial Investment / Annual Profit). In this case, it would be K250,000 / K7,000 = approximately 35.71 years. This means it will take approximately 36 years for the business to return the initial investment of K250,000, assuming the profit remains constant.
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