Question

Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment

Answer 1

Answer and Explanation:

The computation is shown below:

But before reaching any decision, first we have to find out the ROI for new investment which is

ROI of new investment = net operating income ÷ investment

= $12,950 ÷ $70,000

=  18.50%

Now

If investment taken place, then overall ROI is

= Total net operating income ÷ Total average operating assets

= ($380,000 + $12,950) ÷ ($2,000,000 + $70,000)

= 18.98%

As we can see that the overall ROI i.e 18.98% is less than the currently ROI i.e 20% so he should not recommend ROI as it is shows fallen