Compute ROI scenarios
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Saba Signs Company has provided the following data:
Required:
a) Determine ROI before the additional investment.
b) Determine ROI of the additional investment.
c) Determine ROI after the additional investment.
d) Will the manager accept the additional investment using ROI? Why or why not?
e) If Saba wants to increase ROI to 10% but cannot change the current profit level and sales amount, what options does he have? Show your computations.
f) If Saba wants to increase ROI to 10% but cannot change sales or investment, what must the profit become?
g) If Saba wants to increase ROI to 10% given the same level of investment and profit, what must sales become, assuming that the margin on incremental sales is 20%.
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Solution Summary
The solution explains how to calculate the ROI for different scenarios.
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Item End of the year Amount Proposed addition
Sales $2,400,000 600,000
Investment $4,800,000 !,800,000
Profit $384,000 $108,000
a) Determine ROI before the additional investment.
ROI = Profit/Investment = 384,000/4,800,000 = 8%
b) Determine ROI of the additional investment.
ROI = Profit/Investment = 108,000/1,800,000 = 6%
c) Determine ROI after the additional investment.
After the investment, the profit will be added and the investment will be added
ROI = ...
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