Hy\'s is a nationwide hardware and furnishings chain. The manager of the Hy\'s S

Question

Hy's is a nationwide hardware and furnishings chain. The manager of the Hy's Store in Boise is evaluated using ROI. Hy's headquarters requires an ROI of 8 percent of assets. For the coming year, the manager estimates revenues will be $4,690,000, cost of goods sold will be $2,954,700, and operating expenses for this level of sales will be $469,000. Investment in the store assets throughout the year is $3,450,000 before considering the following proposal. A representative of Ace Appliances approached the manager about carrying Ace's line of appliances. This line is expected to generate $1,490,000 in sales in the coming year at Hy's Boise store with a merchandise cost of $1,132,400. Annual operating expenses for this additional merchandise ine total $159,000. To carry the line of goods, an inventory investment of $1,020,000 throughout the year is required. Ace is willing to floor-plan the merchandise so that the Hy store will not have to invest in any inventory. The cost of floor planning would be $124,400 per year. Hy's marginal cost of capital is 8 percent. Ignore taxes. Required a. What is Hy's Boise store's expected ROl for the coming year if it does not carry Ace's appliances? (Enter "ROl" answer as a percentage rounded to 2 decimal places (i.e., 3216).) Regular Merchandise Operating profit Investment

Explanation / Answer

a) Regular Merchandise Operating profit = (4690000-2954700-469000)= 1266300 Investment 3450000 ROI 36.70% b) Regular Merchandise & Appliances Operating profit 1464900 Investment 4470000 ROI 32.77% WORK SHEET FOR ACE APPLIANCES ALONE: Ace Appliances' line with Investment in inventory Operating profit = (1490000-1132400-159000)= 198600 Investment 1020000 c) Regular Merchandise & Appliances Operating profit 1340500 Investment 3450000 ROI 38.86% WORK SHEET FOR ACE APPLIANCES ALONE: Ace Appliances' line with floor plan Operating profit = (1490000-1132400-159000-124400)= 74200 Investment 0 d) The manager would prefer [c] as the ROI is maximum among the alternatives. e-1) Operating profit 1266300 Capital cost (3450000*8%) 276000 EVA 990300 e-2) Operating profit 1464900 Capital cost (4470000*8%) 357600 EVA 1107300 e-3) Operating profit 1340500 Capital cost (3450000*8%) 276000 EVA 1064500 e-4) The manager would prefer [b] as the EVA is maximum

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