Question

The plastics division of a manufacturing company is planning to purchase new equipment costing $100,000. They will dispose of old equipment with a book value of $10,000. No other changes in operating assets are expected. The new equipment is expected to increase operating income by $10,850. The company provided the following current information:Current operating assets - $500,000Controllable margin - 60,000Minimum rate of return - 13% Profit Margin - 20%Compute the original and new return on investment. Would the manager choose to purchase the new equipment?A: Yes, return on investment increases from 12% to 13%.B: No, return on investment decreases from 15.5% to 16.5%.C: Yes, return on investment increases from 14.5% to 15.8%.D: No, return on investment decreases from 13.% to 12.%.

Answer 1

Original return on Investment (ROI) = minimum rate of return = 13%

New ROI = (10,850+60,000)/(500,000+100,000-10,000)=12%

So correct answer is "No, return on investment decreases from 13.% to 12.%."

Step-by-step explanation:

as calculation above