The New Products Division, of Testar Company, had operating income of $8,000,000

Question

The New Products Division, of Testar Company, had operating income of $8,000,000 and operating assets of $44,800,000 during the current year. The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Assuming that the new product is put into production, calculate the division's ROI. Multiple Choice

a. The answer cannot be determined using the information provided.

b. 17.90%

c. 17.60%

d. 16.50%

Explanation / Answer

Answer : c. 17.60 %

Divisions's ROI after putting the new product into production = $ ( 8,000,000 + 1,400,000) / $ ( 44,800,000 + 8,500,000) * 100 = $ 9,400,000 / $ 53,300,000 * 100 = 17.64 %.

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