Example
You start a delivery business with one employee and one contract. Your initial investment of $12,000 goes to buy a vehicle.
- The contract is for four years and pays you $7,000 each year.
- The employee is paid $2,000 each year.
- Gas to run the vehicle will cost $1,000 each year.
- With perfect foresight the accountant knows the vehicle will die at the end of the four years, so he expenses it at $3,000 each year.
At the end of each year:
- Cash flow will be $4,000 (= 7,000-2,000-1,000). It is paid out to you.
- Net income will be $1,000 (= 7,000-2,000-1,000-3,000).
- The ROC is $3,000 (= cash received - net income) (= 4,000-1,000).
At the end of four years:
- You have received cash payments of $16,000 (= 4,000*4).
- Total ROC payments equal $12,000 (= 3,000*4).
- Total income payments equal $4,000 (= 1,000*4).
- Your initial investment has been 100% recovered by the ROC (= 12,000-12,000).
- Your vehicle is now dead and worth nothing.
- Without it, you need to repeat your investment in order to keep operating, so the business is worth nothing.
Read more about this topic: Return Of Capital
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“Our intellect is not the most subtle, the most powerful, the most appropriate, instrument for revealing the truth. It is life that, little by little, example by example, permits us to see that what is most important to our heart, or to our mind, is learned not by reasoning but through other agencies. Then it is that the intellect, observing their superiority, abdicates its control to them upon reasoned grounds and agrees to become their collaborator and lackey.”
—Marcel Proust (1871–1922)