Return on investment and payback for a dealership

ROI on the total investment, payback with equal and uneven cash flows, and comparing two showrooms.

How numbers are rounded on these pages. Calculations are done at full precision and rounded only at the end, half up. Rupee amounts are rounded to the nearest rupee unless shown with paise, in which case to the nearest paisa. Percentages are shown to two decimal places, days to one decimal place, and payback periods in years to two decimal places. Interest for a number of days uses a 365-day year (simple interest). Break-even job counts and units needed to cover a cost are rounded up to the next whole number. All examples and quiz questions are Hypothetical: they show the method, not real prices or rates.

Return on investment and payback for a dealership

Before opening or upgrading a showroom, ask two questions. Return on investment (ROI): each year, how much profit does the business earn for every ₹100 put in? Payback period: how many years until the cash coming in has repaid the money put in?

Count everything you invest: fit-out to brand standards, security deposit, opening stock and other working capital. For payback, use cash coming in, which is net profit plus depreciation (depreciation is a cost in the accounts but not a cash payment). Both measures are simple and ignore the timing of money; for that, see NPV on the new-products investment page.

The standard formulas

Return on investment (accounting rate of return)ROI % = Average annual net profitTotal investment × 100

Annual net cash inflow = Net profit + Depreciation

PaybackPayback period = InvestmentAnnual net cash inflow (equal yearly cash flows)

Uneven cash flows: Payback = Years before full recovery + Amount still to recoverCash flow in the next year

Terms used

Investment: All the money put in at the start: fit-out, equipment, deposits, opening stock and working capital.
Net profit: Profit after all expenses, including depreciation and interest (before or after tax; be consistent).
Depreciation: The share of the cost of fixed assets, such as showroom fit-out, charged as an expense each year.
Payback period: Time for cumulative cash inflows to equal the investment.

Worked examples

HypotheticalBasicROI on a new showroom

A dealer invests ₹50,00,000: fit-out ₹20,00,000, security deposit ₹10,00,000, stock and working capital ₹20,00,000. Expected annual net profit is ₹7,50,000.

ROI = ₹7,50,000 ÷ ₹50,00,000 × 100 = 15.00%

HypotheticalIntermediatePayback with equal cash flows

Same showroom. Depreciation on the fit-out is ₹2,50,000 a year.

Annual net cash inflow = ₹7,50,000 + ₹2,50,000 = ₹10,00,000
Payback = ₹50,00,000 ÷ ₹10,00,000 = 5.00 years

HypotheticalAdvancedPayback with uneven cash flows

A ₹40,00,000 dealership expects net cash inflows of ₹6,00,000, ₹9,00,000, ₹12,00,000, ₹14,00,000, ₹15,00,000 in years 1 to 5.

End of year 1: cumulative ₹6,00,000
End of year 2: cumulative ₹15,00,000
End of year 3: cumulative ₹27,00,000
End of year 4: cumulative ₹41,00,000
After year 3, ₹13,00,000 is still to recover; year 4 brings ₹14,00,000.
Payback = 3 + ₹13,00,000 ÷ ₹14,00,000 = 3.93 years

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Return on investment and payback for a dealership