Question

Return on Investment and Economic Value Added Calculations with varying Assumptions Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to earn income of $310,000 based on sales of $3.45 million. Without any new investments, the division will have average operating assets of $3 million. The division is considering a capital investment project-adding knitting machines to produce gaiters-that requires an additional investment of 5600,000 and increases net income by $57,500 (sales would increase by $575,000). If made, the investment would increase beginning operating assets by $600,000 and ending operating assets by $430,000. Assume that the actual cost of capital for the company is 10%. Required: 1. Compute the ROI for the division without the investment. Round your answer to two decimal places. % 2. Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1. Round your answers to two decimal places. Margin Turnover ROI 3. Conceptual Connection: Compute the ROI for the division with the new investment. Round your answer to one decimal place. Do you think the divisional manager will approve the investment? 4. Conceptual Connection: Compute the margin and turnover ratios for the division with the new investment. Round your answers to two decimal places. How do these compare with the old ratios? Margin Turnover

Answer 1

ROI = Operating Income/Average Operating Assets
10.33%
Margin = Operating Income/Sales
8.99%
Turnover = Sales/Average Operating Assets
1.15
ROI = Margin*Turnover
10.33%
ROI After Investment	10.46%
Yes
Margin	9.13%
Turnover	1.15
EVA = Income - Average Operating Assets*Cost of Capital
Without investment	10,000
With Investment	16,000
Yes

1 ROI = Operating Income/Average Operating Assets 2 =310000/3000000 3 4 Margin = Operating Income/Sales 5 =310000/3450000 6 Turnover = Sales/Average Operating Assets 7 =3450000/3000000 8 ROI = Margin *Turnover 9 =A5*A7 10 =(310000+57500)/(3000000+515000) 11 ROI After Investment 12 Yes 13 14 Margin 15 Turnover =(310000+57500)/(3450000+575000) =(3450000+575000)/(3000000+515000) 16 17 EVA = Income - Average Operating Assets * Cost of Capital 18 Without investment 19 With Investment 20 Yes =310000-3000000*10% =(310000+57500)-((3000000+515000)*10%)