For 2012, the New Products Division, of Testar Company, had operating income of

Question

For 2012, the New Products Division, of Testar Company, had operating income of $9,700,000 and operating assets of $46,500,000. The New Products Division has developed a potential new product that would require $10,200,000 in operating assets and would be expected to provide $3,100,000 in operating income each year. Testar has set a target return on investment (ROI) of 21% for each of its divisions. Assuming that the new product is put into production, can the ROI be calculated? If so calculate the division's ROI.

Explanation / Answer

division ROI=operating income/operating assets*100 total operating income=9,700,000+3,100,000 =$12800000 total operating assets=46,500,000+10,200,000=$56700000 ROI=12800000/56700000=22.57%

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