Dave Inc.’s cost of capital is 12%. The company has provided you with a summary

Question

Dave Inc.’s cost of capital is 12%. The company has provided you with a summary of its annual reports from two of its divisions:

Division A

Division B

Capital invested

$3862

$7564

Net Income

$2165

$2991

The manager of Division B is considering a proposal for a new investment that will have the following incremental income and assets over the coming year:

Income

$416

Assets

2599

If the proposal were accepted, what would Division B’s ROI be?

Division A

Division B

Capital invested

$3862

$7564

Net Income

$2165

$2991

Explanation / Answer

Calculate Division B's ROI :

ROI = Net income*100/capital invested

Net income after proposal accepted = (2991+416) = 3407

Assets invested after proposal accepted = (7564+2599) = 10163

ROI = 3407*100/10163 = 33.52%

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