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Acme Manufacturing: Considerations in deciding whether to go

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Acme Manufacturing is a decentralized corporation. Divisions are treated as investment centers. In recent years, Acme has been running about 11% ROA for the corporation as a whole, and has a cost of capital of 9%. One of their most profitable divisions is Turner Products, which last year had ROA of 17% ($1,700,000 operating income on assets of $10,000,000). Turner has an opportunity to expand one of its plants to produce a promising new product. The expansion will cost two million dollars, and is expected to increase operating earnings to $2,100,000.

What factors should Turner's manager and her supervisor, the VP of operations, consider in deciding whether to go forward with the expansion? Show any necessary calculations.

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Solution Summary

Your tutorial is 272 words and gives you 7 factors to consider and compute the project rate of return.

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Investment:

increase assets $ 2,000,000
increase profits $ 2,100,000
expected return on assets 105%

Some factors:

This investment is going to have a large impact. If they are making 17% now, the project will dramatically change their overall profits because it is going to earn much more than that. With one caveat - the timeline for the project is not revealed and the level ...

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Carol Sargent, PhD
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  • MSc, University of Virginia
  • PhD, Georgia State University
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