Question

Bryan manufacturing had sales of $4,000,000 and net operating income of $700,000. operating assets during the year averaged $600,000. the manager of hardcastle is considering the purchase of a new machine which is expected to increase average operating assets by 8%. if the new machine is purchased, the company's new return on investment (roi) would be:

Answer 1

ROI as a financial ratio is calculated as follows:
ROI = Net profit/Total investments

In the current case,
Net profit = Net operating income = $700,000
Total investments = Operating assets = $600,000

After purchasing the new machine,
Total investments = 600,000*1.08 = $648,000

Therefore, the new ROI is;
ROI = 700,000/648,000 ≈ 1.08 = 108%