Westerville Company reported the following results from last year’s operations:

ID: 2525070 • Letter: W

Question

This year, the company has a $250,000 investment opportunity with the following cost and revenue characteristics:

The company’s minimum required rate of return is 10%.

1. If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year?

2. If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year?

3. If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year?

4. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

Westerville Company reported the following results from last year’s operations:

Calculate following :

Net income = (400000*70%-220000)+500000 = 560000

Sales = 400000+2000000 = 2400000

Average operating assets = 1250000+250000 = 1500000

1. If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year?

Margin = 560000*100/2400000 = 23.33%

2. If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year?

Turnover = 2400000/1500000 = 1.6

3. If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year?

ROI = 560000*100/1500000 = 37.33%

4. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

Residual income = 560000-(1500000*10%) = 410000

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