Question

1. Baird Corporation’s balance sheet indicates that the company has $520,000 invested in operating assets. During 2018, Baird earned operating income of $54,080 on $1,040,000 of sales.

Required

1. Compute Baird’s profit margin for 2018.

2. Compute Baird’s turnover for 2018.

3. Compute Baird’s return on investment for 2018.

4. Recompute Baird’s ROI under each of the following independent assumptions:
   (1) Sales increase from $1,040,000 to $1,248,000, thereby resulting in an increase in operating income from $54,080 to $62,400.
   (2) Sales remain constant, but Baird reduces expenses, resulting in an increase in operating income from $54,080 to $56,160.
   (3) Baird is able to reduce its invested capital from $520,000 to $416,000 without affecting operating income.

Compute Baird’s profit margin, turnover and return on investment for 2018. (Round "Profit margin" and "Return on investment" to 1 decimal place.)

	a. Profit margin % b. Turnover times c. Return on investment %

Recompute Baird’s ROI under each of the following independent assumptions: (Do not round intermediate calculations. Round your answers to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

(1) Sales increase from $1,040,000 to $1,248,000, thereby resulting in an increase in operating income from $54,080 to $62,400.

(2) Sales remain constant, but Baird reduces expenses, resulting in an increase in operating income from $54,080 to $56,160.

(3) Baird is able to reduce its invested capital from $520,000 to $416,000 without affecting operating income.

	Return on Investment (1) % (2) % (3) %

2. Dwight Donovan, the president of Fanning Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $114,000 and for Project B are $31,000. The annual expected cash inflows are $35,188 for Project A and $9,780 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Fanning Enterprises’ cost of capital is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

1. Compute the net present value of each project. Which project should be adopted based on the net present value approach?

2. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?

Compute the net present value of each project. Which project should be adopted based on the net present value approach? (Round your intermediate calculations and final answers to 2 decimal places.)

	Net Present Value Project A Project B Which project should be adopted?

Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?

	Internal Rate of Return Project A % Project B % Which project should be adopted?

Answer 1

1)
	2018
Operating Income	54080
Sales	1040000
Operating Assets	520000
a) Profit Margin = Operating Income/sales	5.20%
B) Turnover = Sales/ Operating Assets	2	times
c) ROI = Profit margin x Turnover	10.40%
2)
a.	2018
Operating Income	62400
Sales	1248000
Operating Assets	520000
a) Profit Margin = Operating Income/sales	5.00%
B) Turnover = Sales/ Operating Assets	2.4	times
c) ROI = Profit margin x Turnover	12.00%
b)
	2018
Operating Income	56160
Sales	1040000
Operating Assets	520000
a) Profit Margin = Operating Income/sales	5.40%
B) Turnover = Sales/ Operating Assets	2
c) ROI = Profit margin x Turnover	10.80%
	2018
Operating Income	54080
Sales	1040000
Operating Assets	416000
a) Profit Margin = Operating Income/sales	5.20%
B) Turnover = Sales/ Operating Assets	2.5	times
c) ROI = Profit margin x Turnover	13.00%