Financial information for a recent year for Apples, Inc. is: Sales $40,000,000 L

Question

Financial information for a recent year for Apples, Inc. is: Sales $40,000,000 Less: Cost of goods sold 25,000,000 Selling and administrative expenses 5,000,000 Interest expense 1,000,000 Income before taxes 9,000,000 Less: income taxes 3,150,000 Net income 5,850,000 Total assets were $104,000,000 and the non-interest-bearing current liabilities were $2,000,000. The company has a required rate of return on invested capital of 10%. Calculate the company’s return on investment.

Can you please explain in detail?

Explanation / Answer

Here, first we need to calculate Net Operating Income.

Tax rate = income taxes/ income before taxes

                = 3,150,000/9,000,000

                =35%

Sales                                                      40,000,000

Cost of goods sold                           -25,000,000

Selling and admin expenses        - 5,000,000

Operating income before taxes   10,000,000

Taxes 35%                                           -3,500,000

Net operating income                    6,500,000

Now we need to compute invested capital

Invested capital = total assets – non-interest bearing current liabilities

                                = 104,000,000 -2,000,000

                                = 102,000,000

Now we can apply the formula of return on Investment:

Return on Investment = Net operating income/ Invested capital

                                                = 6,500,000 / 102,000,000

                                                = 6.37%

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