Answer:
a) $67,250
b) $68,500
c) Investment in Day Company results in a higher return, so I guess investors would probably go for it.
Explanation:
Knight Company's net income = $750,000 - $77,500 = $672,500
total investment in Knight Company = $2,300,000 / 10% = $230,000
earnings per 1$ invested = $672,500 / $2,300,000 = $0.292391
total cash flow = $230,000 x $0.292391304 = $67,250
Day Company's net income = $750,000
earnings per 1$ invested = $750,000 / $3,600,000 = $0.208333333
total investment in Day Company = $360,000, but I borrowed $130,000 to make this investment. The $130,000 will result in $6,500 annual interest payments
total cash flow = ($360,000 x $0.208333333) - $6,500 = $75,000 - $6,500 = $68,500
