Question

Q: According to these statements in Table 6-1, What is the (ROI) Return on Investment?

Table 6-1 ALPHA MANUFACTURING COMPANY, Balance Sheet Cash and Marketable Securities $225,000 Accounts Receivable 890,000 Inventories (lower of cost or market) 930,000 Prepaid Expenses 10,150 Accumulated Tax Prepayments 12.000 Current Assets 2,067,150 Fixed Assets at Cost 2,500,000 less: Accumulated Depreciation 700.000 Net Fixed Asset 1,800,000 Investments, Long-Term 35,000 Goodwill 100.000 Total Assets $4,002.150 Bank Loans and Notes Payable $448,500 Accounts Payable 148,000 Accrued Taxes 36,000 Other Accrued Liabilities 195.500 Current Liabilities 828,000 Long-Term Debt 1,200,000 Common Stock, $1 par value 700,000 Additional Paid-in Capital 174.150 Retained Earnings 1.100.000 Total Net Worth 1,974.150 Total Liabilities and Net Worth $4,002,150 ALPHA MANUFACTURING COMPANY. Income statement Net Sales $5,200,000 less: Cost of Goods Sold 4.576.000 Gross Profit 624,000 Selling General and Administrative Expense 750,000 Depreciation 95,000 Interest Expense 75.000 Earnings Before Taxes (296,000) Income Taxes Earnings After Tax (296,000) Cash Dividends Increase (decrease) in Retained Earnings (5296,000)

Answer 1

We know, Return on investment= (EBIT/ Capital Employed)*100

In this problem,

EBIT= Earnings before taxes + Interest expenses

= $ (-296000+75000)= $(221000)

Capital employed= Total Net worth + Long term debts

= $(1974150+ 1200000) = $ 3174150

Putting the values in the above formula we get,

ROI= (-221000/3174150)*100= (6.96%)

As the return on investments is negative implying investment lost value (not a good financial indicator)