Emily Adams is the manager of City Wide Door, a company specializing in installing and maintaining garage doors of many types. Her associate, Alyssa, has provided Emily with three proposals for different investments in machinery to help expand the business. The minimum required return on investments for City Wide Door is 18 percent.
| Proposal A | Proposal B | Proposal C | |||||||||
| Initial investment | $ | 70,000 | $ | 84,000 | $ | 60,000 | |||||
| Annual operating return | 15,400 | 20,160 | 15,000 | ||||||||
a-1. Calculate the ROI for each proposal?
a-2. If Emily uses ROI to evaluate investments, which proposal would be most profitable for the firm?
b-1. Calculate the residual income for each proposal?
b-2. If Emily uses residual income to evaluate investments, which proposal would be most profitable for the firm?
| a-1 | |||
| Calculation of ROI | |||
| Particulars | Proposal A | Proposal B | Proposal C |
| Initial Investment | $ 70,000.00 | $ 84,000.00 | $ 60,000.00 |
| Annual Operating return | $ 15,400.00 | $ 20,160.00 | $ 15,000.00 |
|
ROI= Annual operating
return*100 Initial Investment |
22% | 24% | 25% |
| a-2 | |||
| On the basis of ROI Proposal C is most profitable. | |||
| b-1 | |||
| Calculation of Residual Income | |||
| Particulars | Proposal A | Proposal B | Proposal C |
| Annual Operating return(A) | $ 15,400.00 | $ 20,160.00 | $ 15,000.00 |
| Initial Investment(B) | $ 70,000.00 | $ 84,000.00 | $ 60,000.00 |
| Minimum Required return(%) (C ) | 18% | 18% | 18% |
| Minimum Required return (D ){B*C} | $ 12,600.00 | $ 15,120.00 | $ 10,800.00 |
| Residual Income(A-D) | $ 2,800.00 | $ 5,040.00 | $ 4,200.00 |
| b-2 | |||
| On the basis of Residual income Proposal B is most profitable. | |||
Emily Adams is the manager of City Wide Door, a company specializing in installing and maintaining...