Question

ZNet co. is a web based retail company. The company reports the following for the past year. The company's CEO believes that sales for next year will increase by 10% and both profit margin and the level of average invested assets will be the same as for the past year
1. Compute return on investment for 20172. Compute profit margin for 20173. If the CEO's forecast is correct, what will return on investment equal for 2018?4. If the CEO's forecast is correct, what will investment turnover equal for 2018?

Answer 1

Answer:

1. 17%

2. 42.5%

3. $2,748,900

4. 44%

Explanation:

1. Return on Investment for 2017

= $\frac{Operating Income}{Average Invested Assets}$

= $\frac{2,499,000}{14,700,000}$

= 17%

2. Profit Margin 2017

= $\frac{Operating Income}{Sales}$

= $\frac{2,499,000}{5,880,000}$

= 42.50%

3. Should the sales increase by 10% in 2018 then the new sales figure will be;

= $5,880,000 + ($5,880,000 *10%)

= $6,468,000

Profit = Sales * Profit Margin

= 6,468,000 * 42.5%

= $2,748,900

Return on Investment for 2018

= $\frac{Operating Income}{Average Invested Assets}$

= $\frac{2,748,900}{14,700,000}$

= 18.7%

4. Investment turnover equal for 2018

= $\frac{ Sales}{Average Invested Assets}$

= $\frac{6,468,000}{14,700,000}$

= 44%