Question

Alpha Inc. and Beta Co. are sheet metal processors that supply component parts for consumer product manufacturers. Alpha has been in business since 1985 and is operating in its original plant facilities. Much of its equipment was acquired in the 80s and 90s. Beta Co. was started two years ago and acquired its building and equipment then. Each firm has about the same sales revenue, and material and labor costs are about the same for each firm.
What would you expect Alpha’s ROI to be relative to the ROI of Beta Co.? Explain your answer.
What are the implications of this ROI difference for a firm seeking to enter an established industry?

Answer 1

Answer: A. Higher

B. The implication for Beta Co. is that because of its lower ROI, its ability to raise capital will be reduced.

Explanation:

a. What would you expect Alpha’s ROI to be relative to the ROI of Beta Co.? Explain your answer.

In this case, Alpha’s ROI to be relative to the ROI of Beta Co. will be higher. Since Alpha's investment cost is lower when compared to that of ‘Beta Co. while both companies have thesame operating income, then the return on investment of Alpha will then be higher than that of Beta due to the lower investment cost that Alpha incurred.

b. What are the implications of this ROI difference for a firm seeking to enter an established industry?

The implication for Beta Co. is that because of its lower ROI, its ability to raise capital will be reduced.