Compute Soto's return on investment for 2011
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1. Soto Corporation's balance sheet indicates that the company has $300,000 invested in operating assets. During 20111, Soto earned operating income of $45,000 on $600,000 of sales.
Required:
A. Compute Soto's profit margin for 2011
B. Compute Soto's turnover for 2011
C. Compute Soto's return on investment for 2011
D. Recompute Soto's ROI under each of the following independent assumptions.
(1) Sales increase from $600,000 to $750,000, thereby resulting in an increase in operating income from $45,000 to $60,000.
(2) Sales remain constant, but reduces expenses resulting in an increasein 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.
2. Ernest Jones is reviewing his company's investments in a cement plant. The company paid $15,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company's discounts rate for present value computations is 8 percent. Expected and actual cash flow as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
Expected $ 3,300,000 $ 4,920,000 $ 4,560,000 $ 4,980,000 $ 4,200,000
Actual $ 2,700,000 $ 3,060,000 $ 4,920,000 $ 3,900,000 $ 3,600,000
Required:
A. Compute the net present value of the expected cash flows as of the beginning of the investment
B. Compute the net present value of the actual cash flows as of the beginning of the investment
C. What do you conclude from this postaudit?
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