Asked by gloria goodman on May 20, 2024
Verified
Sage Division's operating results include:
Controllable margin $300000
Sales revenue $2400000
Operating assets $1000000
Sage is considering a project with sales of $240000 expenses of $168000 and an investment of $360000. Sage's required rate of return is 15%.
Instructions
Determine whether Sage should accept this project.
Operating Assets
Assets that are used in the daily operations of a business to generate revenue, excluding investment and financial assets.
Controllable Margin
The portion of profit or margin that can be directly influenced by managing the controllable costs in a business.
Operating Results
The financial outcomes of a company's core business activities, excluding non-operating revenues and expenses, reflecting its operational efficiency.
- Ascertain and appraise potential investments through the analysis of ROI and additional significant financial metrics.
Verified Answer
AM
Akash MinochaMay 26, 2024
Final Answer :
Current ROI = $300000 ÷ $1000000 = 30%
ROI of new project = $72000 ÷ $360000 = 20%
New ROI with project = [$300000 + $72000] ÷ [$1000000 + $360000] = 27.4%
While ROI decreases that does not make this a bad investment since many projects cause total ROI to fall even though they increase value of the division. The determination is based on how the ROI of the project compares to the required rate of return. The company is not willing to accept any projects with an investment less than 15% so the 20% project should be accepted.
ROI of new project = $72000 ÷ $360000 = 20%
New ROI with project = [$300000 + $72000] ÷ [$1000000 + $360000] = 27.4%
While ROI decreases that does not make this a bad investment since many projects cause total ROI to fall even though they increase value of the division. The determination is based on how the ROI of the project compares to the required rate of return. The company is not willing to accept any projects with an investment less than 15% so the 20% project should be accepted.
Learning Objectives
- Ascertain and appraise potential investments through the analysis of ROI and additional significant financial metrics.