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Delta Roa: factors in deciding expansion?

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Delta Manufacturing is a decentralized corporation. Divisions are treated as investment centers. In recent years, Delta 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 Alpha Products, which last year had ROA of 17% ($1,700,000 operating income on assets of $10,000,000). Alpha has an opportunity to expand one of its plants to produce a promising new product. The expansion will cost $2,000,000 and is expected to increase operating earnings to $2,100,000. What factors should Alpha'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 314 words and gives you 11 factors to consider and compute the project rate of return.

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

Here are some factors to consider:

This project looks like it is a game changer ? going from an average of 17% return on assets to having a project that is going to deliver 105% of the investment (2,100,000 / 2,000,000). While this sounds like wonderful news, there are many reasons for caution.

For instance, if it takes 20 years to get the ...

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