Question

The manager of the Beach Division of Treat Time is evaluating the acquisition of a new mobile ice cream server. The budgeted operating income of the Beach Division is currently $2,940,000 with total assets of $28,600,000 and noninterest-bearing current liabilities of $600,000. The proposed investment would add $18,000 to operating income and would require an additional investment of $120,000. The targeted rate of return for the Beach Division is 9 percent. Ignoring taxes, how much is the return on investment of the Beach Division if the ice cream server is not purchased?

Answer 1

ROI = 10.5%

Step-by-step explanation:

The ROI of a Division is the portion of then operating assets that is earned by as operating income by it. The higher the better.

Net operating assets = 28,600,000 - 600,000 = 28,000,000

ROI = Income/ Net operating assets × 100

ROI = 2,940,000/28,000,000 × 100

= 10.5%