The plastics division of a manufacturing company is planning to purchase new equipment costing $100,000. They will dispose of old equipment with a book value of $10,000. No other changes in operating assets are expected. The new equipment is expected to increase operating income by $10,850. The company provided the following current information:Current operating assets - $500,000Controllable margin - 60,000Minimum rate of return - 13% Profit Margin - 20%Compute the original and new return on investment. Would the manager choose to purchase the new equipment? A: Yes, return on investment increases from 12% to 13%. B: No, return on investment decreases from 15.5% to 16.5%. C: Yes, return on investment increases from 14.5% to 15.8%. D: No, return on investment decreases from 13.% to 12.%.

Question

Penny

Business

24 May, 01:03

The plastics division of a manufacturing company is planning to purchase new equipment costing $100,000. They will dispose of old equipment with a book value of $10,000. No other changes in operating assets are expected. The new equipment is expected to increase operating income by $10,850. The company provided the following current information:Current operating assets - $500,000Controllable margin - 60,000Minimum rate of return - 13% Profit Margin - 20%Compute the original and new return on investment. Would the manager choose to purchase the new equipment? A: Yes, return on investment increases from 12% to 13%. B: No, return on investment decreases from 15.5% to 16.5%. C: Yes, return on investment increases from 14.5% to 15.8%. D: No, return on investment decreases from 13.% to 12.%.

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Answers (1)

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Kenny Mathews · Answer 1

Original return on Investment (ROI) = minimum rate of return = 13%

New ROI = (10,850+60,000) / (500,000+100,000-10,000) = 12%

So correct answer is "No, return on investment decreases from 13.% to 12.%."

Explanation:

as calculation above