The CEO of Grace Company, Nicole Grace is debating an investment. The investment is projected to earn $20,000 annually and will require the company to acquire $100,000 in assets. The following chart summarizes Grace’s decision: Before Investment After Investment Operating income 75,000 95,000 Average operating assets 300,000 400,000 Required: Assume Grace is evaluated based on growth in the company’s ROI. Compute the Return on Investment for the company before and after the investment. Would you recommend Grace make the investment? Assume Grace is evaluated based on growth in the company’s residual income. The company’s required rate of return is 15%. Compute the company’s residual income before and after the investment. Would you recommend Grace make the investment? Give at least one advantage and one disadvantage of using measures like ROI and residual income to evaluate company performance.
The CEO of Grace Company, Nicole Grace is debating an investment. The investment is projected to earn $20,000 annually and will require the company to acquire $100,000 in assets. The following chart summarizes Grace’s decision: Before Investment After Investment Operating income 75,000 95,000 Average operating assets 300,000 400,000 Required: Assume Grace is evaluated based on growth in the company’s ROI. Compute the Return on Investment for the company before and after the investment. Would you recommend Grace make the investment? Assume Grace is evaluated based on growth in the company’s residual income. The company’s required rate of return is 15%. Compute the company’s residual income before and after the investment. Would you recommend Grace make the investment? Give at least one advantage and one disadvantage of using measures like ROI and residual income to evaluate company performance.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
The CEO of Grace Company, Nicole Grace is debating an investment. The investment is projected to earn $20,000 annually and will require the company to acquire $100,000 in assets. The following chart summarizes Grace’s decision:
|
|
Before Investment |
After Investment |
|
Operating income |
75,000 |
95,000 |
|
Average operating assets |
300,000 |
400,000 |
Required:
- Assume Grace is evaluated based on growth in the company’s ROI. Compute the
Return on Investment for the company before and after the investment. Would you recommend Grace make the investment? - Assume Grace is evaluated based on growth in the company’s residual income. The company’s required
rate of return is 15%. Compute the company’s residual income before and after the investment. Would you recommend Grace make the investment?
Give at least one advantage and one disadvantage of using measures like ROI and residual income to evaluate company performance.
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