Asked by Nicole Peacock on May 28, 2024
Verified
Familia Inc.reported the following results from last year's operations: 
At the beginning of this year, the company has a $1,200,000 investment opportunity with the following characteristics: 
The company's minimum required rate of return is 13%.
Required:
1.What was last year's return on investment (ROI)? (Round to the nearest 0.1%.)
2.What is the ROI related to this year's investment opportunity? (Round to the nearest 0.1%.)
3.If the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall ROI will this year? (Round to the nearest 0.1%.)
4.If Westerville's chief executive officer earns a bonus only if the ROI for this year exceeds the ROI for last year, would the CEO pursue the investment opportunity? Would the owners of the company want the CEO to pursue the investment opportunity?
Return On Investment
A profitability ratio that calculates the return gained on an investment relative to the investment’s cost.
Investment Opportunity
Investment Opportunity is a term used to describe a business, project, or asset that has the potential to generate significant financial returns or profits.
Minimum Required Rate
The lowest acceptable rate of return on an investment, set by the investor.
- Measure the return on investment (ROI) and acknowledge its implications.
- Conduct an evaluation of investment opportunities focusing on residual income and ROI.
Verified Answer
AS
Ashley SartinMay 29, 2024
Final Answer :
1.Last year's ROI = Net operating income ÷ Average operating assets = $966,000 ÷ $7,000,000 = 13.8%
2.The ROI for this year's investment opportunity is:
ROI = Net operating income ÷ Average operating assets = $192,000 ÷ $1,200,000 = 16.0%
3.If the company pursues the investment opportunity and otherwise performs the same as last year, the ROI will be:
Net operating income = $966,000 + $192,000 = $1,158,000
Average operating assets = $7,000,000 + $1,200,000 = $8,200,000
ROI = Net operating income ÷ Average operating assets = $1,158,000 ÷ $8,200,000 = 14.1%
4.The CEO would pursue the investment opportunity because it increases the overall ROI.The owners of the company would want the CEO to pursue the investment opportunity because its ROI is greater than the company's minimum required rate of return.
2.The ROI for this year's investment opportunity is:
ROI = Net operating income ÷ Average operating assets = $192,000 ÷ $1,200,000 = 16.0%3.If the company pursues the investment opportunity and otherwise performs the same as last year, the ROI will be:
Net operating income = $966,000 + $192,000 = $1,158,000
Average operating assets = $7,000,000 + $1,200,000 = $8,200,000
ROI = Net operating income ÷ Average operating assets = $1,158,000 ÷ $8,200,000 = 14.1%
4.The CEO would pursue the investment opportunity because it increases the overall ROI.The owners of the company would want the CEO to pursue the investment opportunity because its ROI is greater than the company's minimum required rate of return.
Learning Objectives
- Measure the return on investment (ROI) and acknowledge its implications.
- Conduct an evaluation of investment opportunities focusing on residual income and ROI.