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Problem 14-46 (Algo) Equipment Replacement and Performance Measures (LO 14-2)
Oscar Clemente is the manager of Forbes Division of Pitt, Inc., a manufacturer of biotech products. Forbes Division, which has $3.5 million in assets, manufactures a special testing device. At the beginning of the current year, Forbes invested $3.5 million in automated equipment for test machine assembly. The division's expected income statement at the beginning of the year was as follows.
| Sales revenue | $ | 15,600,000 | |
| Operating costs | |||
| Variable | 2,000,000 | ||
| Fixed (all cash) | 7,100,000 | ||
| Depreciation | |||
| New equipment | 1,490,000 | ||
| Other | 1,200,000 | ||
| Division operating profit | $ | 3,810,000 | |
A sales representative from LSI Machine Company approached Oscar in October. LSI has for $7.6 million a new assembly machine that offers significant improvements over the equipment Oscar bought at the beginning of the year. The new equipment would expand division output by 10 percent while reducing cash fixed costs by 5 percent. It would be
The old machine, which has no salvage value, must be disposed of to make room for the new machine.
Pitt has a performance evaluation and bonus plan based on
Required:
a. What is Forbes Division's ROI if Oscar does not acquire the new machine? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).)
b. What is Forbes Division's ROI this year if Oscar acquires the new machine? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).)
c. If Oscar acquires the new machine and it operates according to specifications, what ROI is expected for next year? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).)
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