Consider the following information about a potential project: Investment require

ID: 2546793 • Letter: C

Question

Consider the following information about a potential project:

Investment required $5,000,000

Expected annual project revenue $6,000,000

Expected annual project expenses $5,200,000

Required rate of return 11%

Current division return on investment 18%

a) Calculate the project’s return on investment.

b) Based solely on ROI, is this project in the firm’s best interests? Why or why not?

c) Is this project in the division manager’s best interests? Why or why not?

d) Perform DuPont Analysis on this project.

e) What is the project’s residual income?

a) Project's return on Investment=( Expected annual project revenue6000000-Expected annual project expenses5200000)/Investment=800000/5000000=16%

b)Based soley on ROI, the ROI 16% >Reqd rate of return 11% , so it is in beat interest.

C) Since ROI 16% <Division return of Investment 18%, not in best interest of Division manager

d) Dupont analysis ROE= Profitability× Asset efficiency×Financial leverage

= Profit margin/Revenue×Revenue/Average Total assets×Avg Total assets/ Avg equity.

In the present case it is 80000/5000000=16%

e) Projects residual income=(Projects ROI- Reqd ROI)×Investment

=(16-11)×5000000=$250000

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