Busy Corporation provides business-to-business services on the Internet. Data co
ID: 2418275 • Letter: B
Question
Busy Corporation provides business-to-business services on the Internet. Data concerning the most recent year appear below:
Sales …………………………………………………. $100,000,000
Net operating income ………………………. $800,000
Average operating assets …………………. $30,200,000
Required:
Consider each question below independently. Carry out all computations to two decimal places.
Compute the company’s return on investment (ROI).
The entrepreneur who founded the company is convinced that sales will increase next year by 150% and that net operating income will increase by 400%, with no increase in average operating assets. What would the company’s ROI?
The Chief Financial Officer of the company believes a more realistic scenario would be a $2 million increase in sales, requiring an $800,000 increase in average operating assets, with a resulting $250,000 increase in net operating income. What would be the company’s ROI in this scenario?
Sales …………………………………………………. $100,000,000
Net operating income ………………………. $800,000
Average operating assets …………………. $30,200,000
Explanation / Answer
Formula for Return on Investment is = Net Income/Operating Assets 800000/30200000 ROI is = 2.65% Increase in Sales @ 150% is 100,000,000*250% 250,000,000 Operating Income 140% is 800000 * 240% 800000*240% So Operating Income is 1,920,000 Operating Assets 30,200,000 Return of Investment is = 1920000/30200000 = 1920000/30200000 ROI is = 6.36% As per CFO Increase in Net Income is = 250000 So Revised Net Income is 800000+250000 1,050,000 Revised Operating Assets is 30200000+800000 31,000,000 Return on investment is 1050000/31000000 1050000/31000000 ROI is = 3.39%
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