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Management Consulting
What kind of returns can we expect from a new product development investment and in what time frame? Our net profit rate is 10-15%, we have an outdated product line and few new clients have converted in the last 4-5 years to speak off, would you make such an investment?
ROI is dependent on the cost of money. It is called the internal rate of return. If the investment can make more money than the investment value by the internal rate of return then it is deemed to be good. Typically, a private equity firm will want 7-10x the cost of money so that the payback is short.
The time frame to obtain a return on investment is company dependent and its ability to make money. For a capital expenditure, the return on investment must be captured before the length of the depreciation period, which is dependent on the business’ location tax code. For an investment, the time frame would be dependent on the length of time they are going to hold the investment. As of November 2014, the cost of money is really low. It is only 1.5% max above prime interest rates and since the US treasury bond is not moving it will stay low for a while. A company my brother worked for has an 11-month rule, but they also think every investment should yield 30 to 40%.
The market is large enough that if you can continue to make 10-15% net profit on sales that it would be very lucrative for you to jump in. However, he should spend the money on updating the product first and then move. The expense would be too great to try to jump in without having anything to talk about with potential clients.
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