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Calculating ROI for a development project with a return out 5-10 years

Rebecca LeClaire's Profile

We are considering a rather large R&D investment for our company in which the return is not until years 6 through 16. There would be a number of intangible or "goodwill benefits as well as eventual profits and I am not sure the best way to factor those in along with the "cost of money" between our investment and beginning or the return. So we would make investment in this in year 1 and 2 (lets say $1M) and the production it will trigger will begin in year 6 and continue until year 16. Does anyone have a suggested template or methodology for this?

Answers

Topic Expert
Joseph Ori
Title: CEO
Company: Paramount Capital Corporation
(CEO, Paramount Capital Corporation) |

The best analysis is as follows:

1. Prepare the 16 year cash flow from the investment. If the CF is some years is zero or negative include as such.

2. Discount the $1M initial investment and CF's at your company's weighted average cost of capital. If the NPV is positive accept the investment, if negative reject or restructure the investment.

Mark Vivaronda
Title: SVP FP&A
Company: FB Financial Corp
(SVP FP&A, FB Financial Corp) |

I would also recommend adding a premium to your WACC. So your discount rate would reflect a "risk" component.

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