Question

Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company is considering the purchase of equipment that will reduce expenses by $20,000.The equipment will cost $100,000 and be purchased by issuing a notes payable. Sales will remain unchanged. If Valley accepts the project, its return on investment (ROI) after the purchase is projected to__________ (increase/desrease) from the current level of _________% to the new return on investment (ROI) of___________%

Answer 1

Answer: increase,  10% , 12%

Explanation:

If Valley accepts the project, its return on investment (ROI) after the purchase is projected to increase (increase/decrease) from the current level of 10% to the new return on investment (ROI) of 12%

Net income = $40000

Average operating assets = $400000

Return on investment = 40000/400000 = 0.1 = 10%

New equipment will result to the cost savings of $20000. when expenses decrease by $20000 net income will increase by $20000. the new net income is $40000 plus $20000 = $60000

New net income = $60000

New Operating Assets = $400000 + $100000 = $500000

New Return on investment = 60000/500000 = 0.12 = 12%