Question

The investment in ABC Corp. returned 40% over two years, while the investment in XYZ Corp. returned 50% in five years. The XYZ Corp. investment made more profit overall for a ROI of 50%. But the ABC Corp. investment having a shorter duration, returned 20% on an annual basis generating a higher annual ROI. Which one would you choose to invest and why ?

Answer 1

Hi

One would choose to invest in ABC Corp. Reasons -

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment's cost.

Snapshot of the reasons are in the image below:

Reasons-

1. Annual ROI

The Annual ROI is the return on investment on an annual basis. Here,

1. 1. ABC – Returns 40% over 2 years which is equivalent to a return of 20% per year
2. 2. XYZ – Returns 50% over 5 years which is equivalent to a return of 10% per year

Since, the Annual ROI of ABC is higher than that of XYZ, ABC is preferable.

2. Compounded Annual Growth Rate

Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment's lifespan.

This means the investment grows at an average annual rate of CAGR% every year over the life of investment.

1. 1. ABC – CAGR of around 18%
2. 2. XYZ - CAGR of around 8%

Since, the CAGR of ABC is higher than that of XYZ, ABC is preferable.