Question

Pioneer Brewing Company is investing $1,000,000 in cash into a project to build a bottling facility. The $1,000,000 of cash will come from existing cash on hand, and will be paid up front to the contractor. The project will not generate significant return on investment for at least two years, but after that is expected to increase profits significantly. What affect will this $1,000,000 investment have in the short term, on the following ratios?

multiple choice

Current Ratio

      [ Choose ]            In the short-term, this ratio will likely decrease            In the short-term, this ratio will not be affected by this project      

ROE

      [ Choose ]            In the short-term, this ratio will likely decrease            In the short-term, this ratio will not be affected by this project      

Answer 1

1. Current ratio is calculated as= Current assets/ current liabilities

As $1000000 is paid from cash in hand it will decrease its current assets.

In the short term, the current ratio will likely to decrease

1. Current ratio is calculated as= Earnings for equity/ Equity fund*100

Project will generate returns from third year ownwards. For next two years there will be no significant return on equity

In the short term, the ROE  will not be affected by project