Return on Investment and Economic Value Added Calculations with Varying Assumptions Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to earn income of $320,000 based on sales of $3.45 million. Without any new investments, the division will have average operating assets of $3 million. The division is considering a capital investment project-adding knitting machines to produce gaiters-that requires an additional investment of $650,000 and increases net income by $57,500 (sales would increase by $575,000). If made, the investment would increase beginning operating assets by $650,000 and ending operating assets by $410,000. Assume that the actual cost of capital for the company is 7%. 4. Conceptual Connection: Compute the margin and turnover ratios for the division with the new investment. Round your answers to two decimal places. How do these compare with the old ratios? Margin 8 Turnover
Return on Investment and Economic Value Added Calculations with Varying Assumptions Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to earn income of $320,000 based on sales of $3.45 million. Without any new investments, the division will have average operating assets of $3 million. The division is considering a capital investment project-adding knitting machines to produce gaiters-that requires an additional investment of $650,000 and increases net income by $57,500 (sales would increase by $575,000). If made, the investment would increase beginning operating assets by $650,000 and ending operating assets by $410,000. Assume that the actual cost of capital for the company is 7%. 4. Conceptual Connection: Compute the margin and turnover ratios for the division with the new investment. Round your answers to two decimal places. How do these compare with the old ratios? Margin 8 Turnover
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Accounting
Return on Investment and Economic Value
Added Calculations with Varying Assumptions
Knitpix Products is a division of Parker Textiles
Inc. During the coming year, it expects to earn
income of $320,000 based on sales of $3.45
million. Without any new investments, the
division will have average operating assets of $3
million. The division is considering a capital
investment project-adding knitting machines
to produce gaiters-that requires an additional
investment of $650,000 and increases net
income by $57,500 (sales would increase by
$575,000). If made, the investment would
increase beginning operating assets by
$650,000 and ending operating assets by
$410,000. Assume that the actual cost of capital
for the company is 7%.
4. Conceptual Connection: Compute the margin and turnover ratios for the division with the new investment. Round your answers to two decimal places. How do these compare
with the old ratios?
Margin
Turnover
5. Conceptual Connection: Compute the EVA of the division with and without the investment.
EVA without the investment
EVA with the investment
Should the manager decide to make the knitting machine investment?
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