Calculating ROI

[benofbrisbane]

Hi all

I was just wondering which method would be the most appropriate to calculating a projects ROI. The project is a the construction of town houses behind an existing house. The house will be kept.

Say the purchase price of the house was $800k and after the project is done (i.e. the townhouses built out the back) it would sell for $600k. Accordingly, when calculating the ROI do just use the $200k 'land costs' and disregard the sale of the land when doing my figures. When I do it this way the ROI comes out at 28% ROI. However, when I use the whole project, ie including the purchase at 800K and subsequent sale at 600k is comes out at an ROI of 18% (less than 20% eek!)

I am thinking that as the house is already there and does not need to be touched and therefore there is no risk associated with it that it ought to be disregarded and I should simply use the land component that I am 'borrowing' from the house to give myself the best reflection of the risk/return of the project.

Has anyone got any thoughts?

Thanks

Ben

 

[HD_ACE]

(Value-cost)/cost = ROI. Ie profit divide by cost.