Asked by Ashley Iguina on Jul 29, 2024
Verified
Cabell Products is a division of a major corporation. Last year the division had total sales of $25,320,000, net operating income of $1,924,320, and average operating assets of $6,000,000. The company's minimum required rate of return is 10%.The division's return on investment (ROI) is closest to:
A) 135.5%
B) 6.1%
C) 32.1%
D) 2.4%
Net Operating Income
A company's income after operating expenses are deducted, but before income taxes and interest are deducted.
Average Operating Assets
The average value of the assets used in the normal operating activities of a business over a specific period.
Return On Investment
A measure of the profitability of an investment, calculated as a percentage of the return divided by the cost of the investment.
- Understand how to calculate Return on Investment (ROI) and interpret its value.
- Evaluate division performance using financial metrics such as net operating income, sales, and average operating assets.
Verified Answer
ROI = 1,924,320 / 6,000,000 = 0.3207 or 32.1%
Since the ROI is higher than the minimum required rate of return of 10%, the division is generating a positive return for the corporation.
Learning Objectives
- Understand how to calculate Return on Investment (ROI) and interpret its value.
- Evaluate division performance using financial metrics such as net operating income, sales, and average operating assets.
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