Question

You must prepare a return on investment analysis for the regional manager of Fast & Great Burgers. This growing chain is trying to decide which outlet of two alternatives to open. The first location (A) requires a $1,000,000 average investment and is expected to yield annual net income of $160,000. The second location (B) requires a $600,000 average investment and is expected to yield annual net income of $108,000. Compute the return on investment for each Fast & Great Burgers alternative.

Answer 1

Answer:

ROI for location A = 16%

ROI for Location B = 18%

Explanation:

Return on Investment is the proportion of operating assets that an investment center earned as as net operating income.

It is calculated as follows

ROI = operating income/operating assets

ROI for Investment center for first location

= (160,000/1,000,000) × 100

=16%

ROI for Investment center for second location

=(108,000/600,000) × 100

= 18%

Answer 2

Answer:

First location ROI is 16%

Second location ROI is 18%

Explanation:

The formula for return on investment is given as the net income divided by the average investment that yielded the net income.

The ROI for the proposed first location is computed thus:

average investment required in the first location is $1,000,000

Annual net income expected from  first location is $160,000

Return on investment=$160,000/$1000,000*100

                                     =16.00%

The ROI for the proposed second location is computed thus:

average investment required in the first location is $600,000

Annual net income expected from  first location is $108,000

Return on investment=$108,000/$600,000*100

                                     =18.00%

Based on ROI , the second location is preferred since it results in  a higher ROI with less average investment