Question

The chief operating officer of the Wisconsin Corporation is considering the effect of depreciation on the company’s ROI. In the most recent year, net operating profit after taxes was $35,000,000 and investment (total assets of $460,000,000 less noninterest-bearing current liabilities of $20,000,000) was $440,000,000.

Required

a. Assuming that total assets will decline each year by 6 percent due to depreciation of plant and equipment but NOPAT will remain constant, calculate ROI for each of the next 5 years.

b. Explain why evaluation in terms of ROI may lead managers to delay purchases of equipment that, in the long run, will be needed to remain competitive.

Answer 1

a) ROI or Return on investment

=Net profit /Total investment *100

( Total investment = Total assets - Non - interest bearing current liabilities).

* ROI for Year 1, Given ,

Net operating profit after tax =$35, 000,000 and investment =$440, 000,000

Therefore ROI = 35,000,000/440,000,000*100 = 7.95%

*ROI for Year 2, given,

NOPAT =$35,000,000 and the investment will change to $412,400,000 i.e. Total assets wilk reduce by 6% during year 2 and the total assets will become $432,400,000 less non interest bearing current liabilities of $20,000 000.

Therefore ROI = $35,000,000/$412,400,000*100 =8.48%

*ROI for Year 3, Given,

NOPAT =$35, 000,000 and investment will decline to $386,456,000 I. e. Total assets wikl reduce by another 6% and will become $406,456,000 less non interest bearing current liabilities $20,000,000 .

Therefore ROI = $35,000,000/$386,456,000*100 =9.05%

*ROI for Year 4, Given ,

NOPAT =$35, 000,000 and investment will reduce to $362,068,640 i. e. Total assets will reduce by another 6% and will become $382,068,640 less non interest bearing current liabilities of $20,000,000.

Therefore, ROI = $35,000,000/$362,068,640*100= 9.66%

*ROI for Year 5, given  

NOPAT =$35, 000,000 and total investment will reduce to $339,144,522 I. e. Total assets will reduce by another 6% in year 5 and will become $359,144,522 less non interest bearing current liabilities &$20,000,000.

Thetefore ROI = &$35,000,000/$339,144,522*100= 10.32%

b) ROI is a performance measure used to evualuate the efficiency of a number of different investments. Measuring and analyzing ROI can benefit the brand of a company and marketing strategies by increasing effectiveness and building foundation flr successful future campaigns.

Competitive advantage is the advantage gained over competitors by offering customers greater value ,when ROIRis used for organization benefit, the manager is ableato determine conpetitive advantage and strengthen to improve the company's brand and can surpass the competitors marketing initiatives. ROI on the other hand allows the manager to build and sustain an efficient budget. It also helps to plan, build next budget strategy and also determines the areas of budget that need to be increased or decreased based on their specific ROI measurements.

ROI also helps to set realistic and attainae goals to improve overall marketing strategy of the company and continue growing the brand of the company.