The CFO of Carrie Electric Auto, Mary Scofield is debating an investment. The investment is projected to earn $100,000 annually and will require the company to acquire $600,000 in assets. The following chart summarizes Mary’s decision: Before InvestmentAfter InvestmentSales $ 3,500,000 $ 4,100,000Operating Income $ 600,000 $ 700,000Average Operating Assets 3,000,000 3,600,000Calculate: Assume Mary is evaluated based on growth in the company’s ROI. Compute the Return on Investment including the margin and turnover components for the company before and after the investment. Would you recommend Mary make the investment? Why (refer to margin and turnover in your answer)?Assume Mary is evaluated based on growth in the company’s residual income. The company’s required rate of return is 15%. Compute the company’s residual income before and after the investment. Would you recommend Mary make the investment? Give at least one advantage and one disadvantage of using measures like ROI and residual income to evaluate company performance.

Return On Investment is the percentage of investment recovered in a financial period. Return on…

Answered: Assume Mary is evaluated based on…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

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The CFO of Carrie Electric Auto, Mary Scofield is debating an investment. The investment is projected to earn $100,000 annually and will require the company to acquire $600,000 in assets. The following chart summarizes Mary’s decision:

	Before Investment	After Investment
Sales	$ 3,500,000	$ 4,100,000
Operating Income	$ 600,000	$ 700,000
Average Operating Assets	3,000,000	3,600,000

Calculate:

Assume Mary is evaluated based on growth in the company’s ROI. Compute the Return on Investment including the margin and turnover components for the company before and after the investment. Would you recommend Mary make the investment? Why (refer to margin and turnover in your answer)?
Assume Mary is evaluated based on growth in the company’s residual income. The company’s required rate of return is 15%. Compute the company’s residual income before and after the investment. Would you recommend Mary make the investment?
Give at least one advantage and one disadvantage of using measures like ROI and residual income to evaluate company performance.

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