Question

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.
%

Answer 1

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 ekkarill92 Next > < Previous Related Solutions 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... ROI and Investment Decisions Jarriot, Inc., presented two years of data for its Furniture Division and... 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