Question

Salco plans to renovate one of its plants, which will require an added investment in plant and equipment of $1 million. The firm will maintain its present debt ratio of 0.5 when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13 percent. What will be the new operating return on assets for Salco after the plant's renovation?

Answer 1

The new operating return on assets (ROA) for Salco after the plant's renovation will be 13%.

Step-by-step explanation:

The new operating return on assets (ROA) for Salco after the plant's renovation can be calculated using the formula:

ROA = Operating Profit Margin x Asset Turnover

Given that the operating profit margin will rise to 13% and the sales remain constant, the asset turnover can be calculated as the Total Assets divided by the Sales. However, since the sales remain constant, the asset turnover will also remain constant.

Therefore, the new operating return on assets for Salco after the plant's renovation will be 13%.