Question

The current controllable margin for Henry Division is $138000. Its current operating assets are $300000. The division is considering purchasing equipment for $90000 that will increase annual controllable margin by an estimated $5000. If the equipment is purchased, what will happen to the return on investment for Henry Division

Answer 1

Answer:

The correct answer is Decrease ROI by 9.33%.

Explanation:

According to the scenario, the computation of the given data are as follows:

First we calculate return on investment before purchase:

Return on investment = (Controllable Margin ÷ Operating assets  ) × 100

= ($138,000 ÷ $300,000) × 100

= 46%

Controllable margin (New) = $138,000 + $5,000 = $143,000

Operating assets = $300,000 + $90,000 = $390,000

Return on investment (New) = ($143,000 ÷ $390,000) × 100

= 36.67%

So, change in ROI = 36.67 % - 46%

= - 9.33% ( Negative shows decrease )

Hence, Decrease ROI by 9.33%.