Question

Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 If the CEO's forecast is correct, what will return on investment equal for 2018? Choose Numerator: Operating income Return on Investment 1 Choose Denominator: 1 Average invested assets Return on Investment Return on investment < Required 2 Required 4 >

Answer 1

Solution of the above problem is as under:

1) Computation of Return on Investment for 2017

Return on Investment= (Operating Income/Average Invested Assets)X 100

=(7766000/35300000)*100

=22%

2) Computation of Profit Margin for 2017

Profit Margin (In Percentage)=(Operating Income/Sales Revenue)X 100

=(7766000/17650000)*100

=44%

3) Computation of Return on Investment for 2018 (Assuming CEO's forecast is correct)

As per CEO's forecast, Sales for 2018 will increase by 30% and both Profit Margin (%) and Average Invested Assets remain the same as that in 2017

New Sales= 17650000*130%=$22945000

Now As Profit Margin (%) is Same as that of 2017

Profit Margin (%)= (Operating Income/Sales)X 100

.i.e 44=(Operating Income/22945000)X 100

Therefore, Operating Income for 2018= $ (44*22945000)/100

=$10095800

Return on Investment for 2018= (Operating Income/Average Invested Assets)X 100

=(10095800/35300000)*100

=28.6%

4) Computation of Investment Turnover Ratio for 2018 (Assuming CEO's forecast is correct)

Investment Turnover = (Sales / Average Invested Assets)

= 22945000/35300000

=0.65