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 After Investment Investment Sales $ 3,500,000 $ 4,100,000 Operating Income Average Operating Assets 600,000 $ 700,000 3,000,000 3,600,000 Required: a.) 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)? b.) 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? c.) Give at least one advantage and one disadvantage of using measures like ROI and residual income to evaluate company performance.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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
After
Investment
Investment
Sales
$ 3,500,000 $ 4,100,000
Operating Income
600,000 $
700,000
Average Operating Assets
3,000,000
3,600,000
Required:
a.)
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)?
b.) 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?
c.) Give at least one advantage and one disadvantage of using measures like ROI and residual income to evaluate
company performance.
Transcribed Image Text: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 After Investment Investment Sales $ 3,500,000 $ 4,100,000 Operating Income 600,000 $ 700,000 Average Operating Assets 3,000,000 3,600,000 Required: a.) 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)? b.) 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? c.) Give at least one advantage and one disadvantage of using measures like ROI and residual income to evaluate company performance.
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