Familia Incorporated reported the following results from last year's operations:
At the beginning of this year, the company has a $1,200,000 investment opportunity with the following characteristics:
The company's minimum required rate of return is 13%.
Required:
1. What was last year's return on investment (ROI)? (Round to the nearest 0.1%.)
2. What is the return on investment related to this year's investment opportunity? (Round to the nearest 0.1%.)
3. If the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall return on investment will this year? (Round to the nearest 0.1%.)
4. If Westerville's chief executive officer earns a bonus only if the return on investment for this year exceeds the return on investment for last year, would the chief executive officer pursue the investment opportunity? Would the owners of the company want the chief executive officer to pursue the investment opportunity?

Question

Familia Incorporated reported the following results from last year's operations:

At the beginning of this year, the company has a $1,200,000 investment opportunity with the following characteristics:

The company's minimum required rate of return is 13%.
Required:
1. What was last year's return on investment (ROI)? (Round to the nearest 0.1%.)
2. What is the return on investment related to this year's investment opportunity? (Round to the nearest 0.1%.)
3. If the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall return on investment will this year? (Round to the nearest 0.1%.)
4. If Westerville's chief executive officer earns a bonus only if the return on investment for this year exceeds the return on investment for last year, would the chief executive officer pursue the investment opportunity? Would the owners of the company want the chief executive officer to pursue the investment opportunity?

Libby Mckill · Accepted Answer

Final Answer :

1. Last year's Return on investment = Net operating income ÷ Average operating assets = $966,000 ÷ $7,000,000 = 13.8%
2. The return on investment for this year's investment opportunity is:

Return on investment = Net operating income ÷ Average operating assets = $192,000 ÷ $1,200,000 = 16.0%
3. If the company pursues the investment opportunity and otherwise performs the same as last year, the return on investment will be:
Net operating income = $966,000 + $192,000 = $1,158,000
Average operating assets = $7,000,000 + $1,200,000 = $8,200,000
Return on investment = Net operating income ÷ Average operating assets = $1,158,000 ÷ $8,200,000 = 14.1%
4. The chief executive officer would pursue the investment opportunity because it increases the overall return on investment. The owners of the company would want the chief executive officer to pursue the investment opportunity because its return on investment is greater than the company's minimum required rate of return.

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