Question

last year, valley manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. the company is considering the purchase of equipment that will reduce expenses by $20,000. the equipment will increase average operating assets by $100,000 and be purchased by issuing a notes payable. sales will remain unchanged. if valley accepts the project, its return on investment (roi) after the purchase is projected to (increase/decrease) from the current level of % to a new return on investment (roi) of %. (enter roi percentages as whole numbers.)

Answer 1

Current:    

Net operating income 40000  

Divide by Average Operating assets 400000  

ROI 10%  

   

Revised    

Net operating income 60000  =40000+20000

Divide by Average Operating assets 500000  =400000+100000

ROI 12%  

   

If Valley accepts the project, its return on investment (ROI) after the purchase is projected to increase from the current level of 10% to the new return on investment (ROI) of 12%.

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