A company must choose between two projects. Project Alpha will cost $200,000 and is expected to generate $300,000 in revenue. Project Beta will cost $150,000 and is expected to generate $250,000 in revenue. Which project provides a higher percentage return on the initial investment?
To determine which project provides a higher percentage return, we calculate the Return on Investment (ROI) for each project. ROI is calculated as
ROI = [(Gain from Investment - Cost of Investment) ÷ Cost of Investment] × 100%
For Project Alpha: ROI = [($300,000 - $200,000) ÷ $200,000] × 100% = 50%
For Project Beta: ROI = [($250,000 - $150,000) ÷ $150,000] × 100% = 66.7%
Therefore, Project Beta provides a higher percentage return on the initial investment. While both projects yield a net gain of $100,000, Project Beta offers a greater return relative to its cost.
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Why does Project Beta have a higher percentage ROI despite both projects having the same net gain?