Question

Alpha Division had the following information: Average operating asset base in Alpha Division $500,000 Operating income in Alpha Division $60,000 Cost of capital 14% Target return on investment (ROI) 16% Margin for Alpha Division 21% If the asset base is decreased by $120,000, with no other changes, what will Alpha Division's return on investment be? (Note: Round answer to two decimal places.) a. 18.50% b. 15.79% c. 10.50% d. 12.55%

Answer 1

Answer: Option B

Explanation: As we know that,

$ROI=\frac{Operating\ income}{total\ assets}$

where,

Operating income = $60,000

total asset = current asset base - decrease in current asset base

total asset = $500,000 - $120,000

                  = $ 380,000

Now, putting the values into equation we get :-

$ROI\:=\:\frac{\ 60,000}{\ 380,000}$

               = 15.79%