How would ROI be affected if the invested capital were measured at gross book value, and the gross book values of the beginning and end of the year assets without the new machine were ?11,000,000 and ?11,800,000, respectively?
The manager of the SkyHigh division of Superball Corp. is faced with a decision on whether or not to buy a new machine that will mix the ingredients used in the SkyHigh superball produced by the SkyHigh division. This ball bounces as high as a two-story building upon first bounce and is so popular that the SkyHigh division barely keeps up with demand. The manager is hoping the new machine will allow the balls to be produced more quickly and therefore increase the volume of production within the same time currently being used in production. The manager wants to evaluate the effect of the purchase of the machine on his compensation. He receives a base salary plus a 25% bonus of his salary if he meets certain income goals. The information he has available for the analysis is shown here:
| Cost of the machine | 2,000,000 |
| Income to be generated by the machine | 1,000,000 |
| Income without the new machine | 7,000,000 |
| Beginning capital asset (without machine) | 8,000,000 |
| Ending capital asset (without machine) | 8,400,000 |
| Tax rate | 30% |
| Minimum required |
15% |
| Weighted average cost of capital | 9% |
| Sales revenue without machine | 18,000,000 |
| Sales revenue with machine | 19,400,000 |
The manager is looking at several different measures to evaluate this decision. Answer the following questions:
- How would ROI be affected if the invested capital were measured at gross book value, and the gross book values of the beginning and end of the year assets without the new machine were ?11,000,000 and ?11,800,000, respectively?
Step by step
Solved in 2 steps
