Question

Hy’s is a nationwide hardware and furnishings chain. The manager of the Hy’s Store in Boise is evaluated using ROI. Hy’s headquarters requires an ROI of 8 percent of assets. For the coming year, the manager estimates revenues will be $4,720,000, cost of goods sold will be $2,973,600, and operating expenses for this level of sales will be $472,000. Investment in the store assets throughout the year is $3,440,000 before considering the following proposal.

A representative of Ace Appliances approached the manager about carrying Ace's line of appliances. This line is expected to generate $1,420,000 in sales in the coming year at Hy’s Boise store with a merchandise cost of $1,079,200. Annual operating expenses for this additional merchandise line total $150,000. To carry the line of goods, an inventory investment of $1,020,000 throughout the year is required. Ace is willing to floor-plan the merchandise so that the Hy store will not have to invest in any inventory. The cost of floor planning would be $124,500 per year. Hy’s marginal cost of capital is 8 percent. Ignore taxes.

Required:

a. What is Hy’s Boise store's expected ROI for the coming year if it does not carry Ace's appliances? (Enter "ROI" answer as a percentage rounded to 2 decimal places (i.e., 32.16).)

b. What is the store's expected ROI if the manager invests in Ace's inventory and carries the appliance line? (Enter "ROI" answer as a percentage rounded to 2 decimal places (i.e., 32.16).)

c. What would the store's expected ROI be if the manager elected to take the floor plan option? (Enter "ROI" answer as a percentage rounded to 2 decimal places (i.e., 32.16).)

d. Would the manager prefer (a), (b), or (c) if evaluated using ROI?

	The case where the manager elected to take the floor plan option.
	The case where Hy's Boise store does not carry Ace's appliances.
	The case where the manager invests in Ace's inventory and carries the appliance line.

e-1. What is Hy’s Boise store's expected EVA for the coming year if it does not carry Ace's appliances?

e-2. What is the store's expected EVA if the manager invests in Ace's inventory and carries the appliance line?

e-3. What would the store's expected EVA be if the manager elected to take the floor plan option?

e-4. Would the manager prefer (a), (b), or (c) if evaluated using EVA?

	The case where the manager elected to take the floor plan option.
	The case where Hy's Boise store does not carry Ace's appliances.
	The case where the manager invests in Ace's inventory and carries the appliance line.

Answer 1