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How Much Should I Reinvest in a Business?

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Suppose you invest in a business and receive some return. What do you do with it? On the one hand you could just leave it as cash (or in whatever form it is), or you could use that return to reinvest in the same business and expect it to give you a larger return.

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The consideration here is: if you reinvest too little, the increase in profit would be small; if you reinvest too much, then you would have very little actual income in your hands. So what percentage of your investment return should be used for reinvestment? This Demonstration does this calculation.

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Contributed by: Lucas Tsui (July 2011)
Open content licensed under CC BY-NC-SA

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Assume that you initially invested a certain amount of money into a business to get some revenue. The axis represents the percent of the revenue that is reinvested and the axis represents the total income for the corresponding reinvestment.

For an investment with a return of 100% to 200%, using a retention rate of 80% could maximize income. Though this is not strictly speaking an example of the 80-20 rule, it is still interesting.

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