Problem 15-23 Return on investment
Soto Corporationâ€™s balance sheet indicates that the company has $300,000 invested in
operating assets. During 2011, Soto earned operating income of $45,000 on $600,000 of
a. Compute Sotoâ€™s profit margin for 2011.
b. Compute Sotoâ€™s turnover for 2011.
c. Compute Sotoâ€™s return on investment for 2011.
d. Recompute Sotoâ€™s ROI under each of the following independent assumptions.
(1) Sales increase for $600,000 to $750,000, thereby resulting in an increase in
operating income for $45,000 to $60,000.
(2) Sales remain constant, but Soto reduces expenses resulting in an increase in
operating income from $45,000 to $48,000.
(3) Soto is able to reduce its invested capital from $300,000 to $240,000 without
affecting operating income.
roblem1. Using present value techniques to evaluate alternative investment opportunities.
Delivery is a small company that transports business packages between
New York and Chicago. It operates a fleet of small vans that moves
packages to and from a central depot within each city and uses a common
carrier to deliver the packages between the depots in the two cities.
Fast recently acquired approximately $6 million of cash capital from its
owners, and its president. Don Keenon, is trying to identify the most
profitable way to invest these funds.
Clarence Roy, the company’s
operations manager, believes that the money should be used to expand the
fleet of city vans at a cost of $720,000. He argues that more vans
would enable the company to expand its services into new markets,
thereby increasing the revenue base. More specifically, he expects cash
inflows to increase by $280,000 per year. The additional vans are
expected to have an average useful life of four years and a combined
salvage value of $100,000. Operating the vans will require additional
working capital of $40,000, which will be recovered at the end of the
In contrast, Patricia Lipa, the company’s chief
accountant, believes that the funds should be used to purchase large
trucks to deliver the packages between the depots in the two cities. The
conversion process would produce continuing improvement in operating
savings with reductions in cash outflows as the following.
Year 1 Year 2 Year 3 Year 4
$160,000 $320,000 $400,000 $440,000
large trucks are expected to cost $800,000 and to have a four-year
useful life and a $80,000 salvage value. In addition to the purchase
price of the trucks, up-front training costs are expected to amount to
$16,000. Fast Delivery’s management has established a 16 percent desired
rate of return.
a. Determine the net present value of the two investment alternatives.
b. Calculate the present value index for each alternative.
c. Indicate which investment alternative you would recommend. Explain your choice.