Question

Jarriot, Inc., presented two years of data for its Furniture Division and its Houseware Division. Furniture Division: Year 1 Year 2 Sales $35,600,000 $38,300,000 Operating income 1,420,000 1,600,000 Average operating assets 8,530,000 8,530,000 Houseware Division: Year 1 Year 2 Sales $11,500,000 $12,500,000 Operating income 660,000 600,000 Average operating assets 5,750,000 5,750,000 At the end of Year 2, the manager of the Houseware Division is concerned about the division’s performance. As a result, he is considering the opportunity to invest in two independent projects. The first is called the Espresso-Pro; it is an in-home espresso maker that can brew regular coffee as well as make espresso and latte drinks. While the market for espresso drinkers is small initially, he believes this market can grow, especially around gift-giving occasions. The second is the Mini-Prep appliance that can be used to do small chopping and dicing chores that do not require a full-sized food processor. Without the investments, the division expects that Year 2 data will remain unchanged. The expected operating incomes and the outlay required for each investment are as follows: Espresso-Pro Mini-Prep Operating income $28,000 $15,000 Outlay 200,000 150,000 Jarriot’s corporate headquarters has made available up to $520,000 of capital for this division. Any funds not invested by the division will be retained by headquarters and invested to earn the company’s minimum required rate of return, 9 percent. Required: Round your answers to four decimal places before converting to a percentage. For example, .06349 would be rounded to .0635 and entered as "6.35" percent.

1. Compute the ROI for each investment.

Espresso-Pro ROI____ %

Mini-Prep ROI ____%

2. Compute the divisional ROI for each of the following four alternatives:

a. The Espresso-Pro is added. ____%

b. The Mini-Prep is added. ____%

c. Both investments are added. ____%

d. Neither investment is made; the status quo is maintained.____ %

Answer 1

	Espresso-Pro	Mini-Prep
Operating income	28,000	15,000
Divided by: Average operating assets	200,000	150,000
Return on investment (ROI)	14.00%	10.00%
Both investments earn more than company’s minimum required rate of return.

Option A	Furniture Division	Houseware Division.
		Without investment	Espresso-Pro	Total
Operating income	1,600,000	600,000	28,000	628000
Divided by: Average operating assets	8,530,000	5,750,000	200,000	5950000
Return on investment (ROI)	18.76%			10.55%
Option B	Furniture Division	Houseware Division.
		Without investment	Mini-Prep	Total
Operating income	1,600,000	600,000	15000	615000
Divided by: Average operating assets	8,530,000	5,750,000	150000	5900000
Return on investment (ROI)	18.76%			10.42%
Option C	Furniture Division	Houseware Division.
		Without investment	Espresso-Pro	Mini-Prep	Total
Operating income	1,600,000	600,000	28000	15000	643,000
Divided by: Average operating assets	8,530,000	5,750,000	200000	150000	6,100,000
Return on investment (ROI)	18.76%				10.54%
Option D	Furniture Division	Houseware Division.
Operating income	1,600,000	600,000
Divided by: Average operating assets	8,530,000	5,750,000
Return on investment (ROI)	18.76%	10.43%