investment of P600,000 and increases net operating income by P57,500 (sales would increase by P575,000). If made, the investment would increase beginning net operating assets by P600,000 and ending net operating assets by P400,000. Assume that the minimum rate of return required by the company is 7 percent. Required: 1. Compute the ROI for the division without the investment. 2. Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1. 3. Compute the ROI for the division with the new investment. Do you think · the divisional manager will approve the investment?
investment of P600,000 and increases net operating income by P57,500 (sales would increase by P575,000). If made, the investment would increase beginning net operating assets by P600,000 and ending net operating assets by P400,000. Assume that the minimum rate of return required by the company is 7 percent. Required: 1. Compute the ROI for the division without the investment. 2. Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1. 3. Compute the ROI for the division with the new investment. Do you think · the divisional manager will approve the investment?
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter11: Performance Evaluation And Decentralization
Section: Chapter Questions
Problem 43P: Return on Investment and Economic Value Added Calculations with Varying Assumptions Knitpix Products...
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![Problem 4 (ROI Calculations with Varying Assumptions)
Knix Products is a division of Park Textiles, Inc. During the coming year, it
expects to earn a net operating income of P310,000' based on sales of
P3.45million; without any new investments, the division will have average net
operating assets of P3 million. The division is considering a capital investment
project – adding knitting machines to produce gaiters – that requires an additional
investment of P600,000 and increases net operating income by P57,500 (sales
would increase by P575,000). If made, the investment would increase beginning
net operating assets by P600,000 and ending net operating assets by P400,000.
Assume that the minimum rate of return required by the company is 7 percent.
Required:
1. Compute the ROI for the division without the investment.
2. Compute the margin and turnover ratios without the investment. Show
that the product of the margin and turnover ratios equals the ROI
computed in Requirement 1.
3. Compute the ROI for the division with the new investment. Do you think
· the divisional manager will approve the investment?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe6ff66bb-88c5-4c95-bc9e-68c9173ed0b2%2F0004ab93-571b-405d-9061-ff96e51e1c94%2Fg567m8_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 4 (ROI Calculations with Varying Assumptions)
Knix Products is a division of Park Textiles, Inc. During the coming year, it
expects to earn a net operating income of P310,000' based on sales of
P3.45million; without any new investments, the division will have average net
operating assets of P3 million. The division is considering a capital investment
project – adding knitting machines to produce gaiters – that requires an additional
investment of P600,000 and increases net operating income by P57,500 (sales
would increase by P575,000). If made, the investment would increase beginning
net operating assets by P600,000 and ending net operating assets by P400,000.
Assume that the minimum rate of return required by the company is 7 percent.
Required:
1. Compute the ROI for the division without the investment.
2. Compute the margin and turnover ratios without the investment. Show
that the product of the margin and turnover ratios equals the ROI
computed in Requirement 1.
3. Compute the ROI for the division with the new investment. Do you think
· the divisional manager will approve the investment?
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