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ROI and Investment Decisions Jarriot, Inc., presented two years of data for its Furniture Division and...
ROI and Investment Decisions
Jarriot, Inc., presented two years of data for its Furniture Division and its Houseware Division.
| Furniture Division: | ||
| Year 1 | Year 2 | |
| Sales | $35,000,000 | $37,700,000 |
| Operating income | 1,380,000 | 1,510,000 |
| Average operating assets | 10,460,000 | 10,460,000 |
| Houseware Division: | ||
| Year 1 | Year 2 | |
| Sales | $11,600,000 | $12,700,000 |
| Operating income | 630,000 | 570,000 |
| Average operating assets | 5,700,000 | 5,700,000 |
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 | $15,100 |
| Outlay | 230,000 | 180,000 |
Jarriot’s corporate headquarters has made available up to $570,000 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, 8 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.
%
Solutions
Expert Solution
| 1) | Calculation of ROI for each Investment | ||||||
| Formula of ROI = | Net Profit/Total Investment*100 | ||||||
| A) Expresso -Pro | B) Mini - Prep | ||||||
| Particulars | Figures | Particulars | Figures | ||||
| Investment | $ 2,30,000 | Investment | $ 1,80,000 | ||||
| Operating Income | $ 28,000 | Operating Income | $ 15,100 | ||||
| ROI | 12.17% | ROI | 8.39% | ||||
| 2) | Calculation of divisional ROI for each Investment | ||||||
| A) The Expresso - Pro is Added | |||||||
| Particulars | Furniture Division | Houseware Division | Expesso-Pro | Invested by Headquarter | Total | ||
| Investment | $ 1,04,60,000 | $ 57,00,000 | $ 2,30,000 | $ 3,40,000 | $ 1,67,30,000 | ||
| Operating Income | $ 15,10,000 | $ 5,70,000 | $ 28,000 | $ 27,200 | $ 21,35,200 | ||
| ROI | 14.44% | 10.00% | 12.17% | 8.00% | 12.76% | ||
| Divisional ROI = | 12.76% | ||||||
| B) Mini - Prep is Added | |||||||
| Particulars | Furniture Division | Houseware Division | Mini - Prep | Invested by Headquarter | Total | ||
| Investment | $ 1,04,60,000 | $ 57,00,000 | $ 1,80,000 | $ 3,90,000 | $ 1,67,30,000 | ||
| Operating Income | $ 15,10,000 | $ 5,70,000 | $ 15,100 | $ 31,200 | $ 21,26,300 | ||
| ROI | 14.44% | 10.00% | 8.39% | 8.00% | 12.71% | ||
| Divisional ROI = | 12.71% | ||||||
| C) Both Investment are Added | |||||||
| Particulars | Furniture Division | Houseware Division | Mini - Prep | Expesso-Pro | Invested by Headquarter | Total | |
| Investment | $ 1,04,60,000 | $ 57,00,000 | $ 1,80,000 | $ 2,30,000 | $ 1,60,000 | $ 1,67,30,000 | |
| Operating Income | $ 15,10,000 | $ 5,70,000 | $ 15,100 | $ 28,000 | $ 12,800 | $ 21,35,900 | |
| ROI | 14.44% | 10.00% | 8.39% | 12.17% | 8.00% | 12.77% | |
| Divisional ROI = | 12.77% | ||||||
| D) Both Investment are Added | |||||||
| Particulars | Furniture Division | Houseware Division | Invested by Headquarter | Total | |||
| Investment | $ 1,04,60,000 | $ 57,00,000 | $ 5,70,000 |
$ 1,67,30,000
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Jarriot, Inc., presented two years of data for its Furniture
Division and its Houseware Division.
Furniture Division:
Year 1
Year 2
Sales
$35,000,000
$37,700,000
Operating income
1,380,000
1,510,000
Average operating assets
10,460,000
10,460,000
Houseware Division:
Year 1
Year 2
Sales
$11,600,000
$12,700,000
Operating income
630,000
570,000
Average operating assets
5,700,000
5,700,000
At the end of Year 2, the manager of the Houseware Division is
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Year 1
Year 2
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$35,000,000
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Operating income
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Average operating assets
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Year 2
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Average operating assets
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Operating income
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