12109722

ANS: A PTS: 1 REF: 19.
21. The following information is provided:
Operating Average Operating

Project Income Investment
A £44,000 £400,000
B 70,000 800,000
C 30,000 600,000
Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is
8 per cent.
If you were the division manager and you were evaluated based on ROI, which projects would you
accept?
a. Projects A, B, and C
b. Projects A and C
c. Projects A and B
d. Project A only
ANS: D
SUPPORTING CALCULATIONS:
Project A: ROI = £44,000/£400,000 = 11.0%
Project B: ROI = £70,000/£800,000 = 8.75%
Project C: ROI = £30,000/£600,000 = 5.0%
The division manager would want to accept only the projects with a ROI that exceeds the division's
current ROI of 10 per cent; therefore, only Project A would be accepted.
PTS: 1 REF: 19.7
22. The following information is provided:

A £33,000 £300,000
B 56,250 750,000
C 27,500 550,000
7 per cent.
If you were the president of the company, which projects would you want the division manager to
accept?
b. Projects A and C
c. Projects A and B
d. Project A only
ANS: C
Project A: ROI = £33,000/£300,000 = 11.0%
Project B: ROI = £56,250/£750,000 = 7.5%
Project C: ROI = £27,500/£550,000 = 5.0%
Accept Projects A and B.
PTS: 1 REF: 19.7
Figure 19-1

A £40,000 £800,000
B 44,000 400,000
C 46,875 625,000
6 per cent.
23. Refer to Figure 19-1. If you were the division manager and you were evaluated based on ROI,
which projects would you accept?
b. Projects A and B
c. Projects B and C
d. Project B only
ANS: D
Project A: ROI = £40,000/£800,000 = 5.0%
Project B: ROI = £44,000/£400,000 = 11.0%
Project C: ROI = £46,875/£625,000 = 7.5%
The division manager would want to accept only the projects with a ROI that exceeds the division's
current ROI of 10 per cent; therefore, only Project B would be accepted.
PTS: 1 REF: 19.7
24. Refer to Figure 19-1 above. If you were the president of the firm, which projects would you want
the division manager to accept?
b. Projects B and C
c. Project A only
d. Project B only
ANS: B
Project A: ROI = £40,000/£800,000 = 5.0%
Project B: ROI = £44,000/£400,000 = 11.0%
Project C: ROI = £46,875/£625,000 = 7.5%
Accept Projects B and C.
PTS: 1 REF: 19.7
25. The operating margin for the Randall Company last year was 8 per cent. If total sales are
£1,250,000 and average operating assets are £400,000, ROI was
a. 25%.
b. 20%.
c. 16%.
d. 10%.
ANS: A
ROI = .08  (£1,250,000/£400,000) = 25%
PTS: 1 REF: 19.7
26. If Dixie Company has sales of £1,200,000 and operating assets of £600,000, what operating
margin will they have to earn to generate an ROI of 20 per cent?
a. 5%
b. 7.5%
c. 10%
d. 20%
ANS: C
Turnover = £1,200,000/£600,000 = 2
Operating margin = 20%/2 = 10%
PTS: 1 REF: 19.7
27. The sales in the Components Division last year totaled £600,000, and its ROI was 15 per cent. If
the company's operating margin was 5 per cent, then its average operating assets must have been
a. £4,000,000.
b. £200,000.
c. ££60,000.
d. It cannot be determined from the information given.
ANS: B
ROI = Margin  Turnover
.15 = .05  Turnover
Turnover = 3
Operating assets = £600,000/3 = £200,000
PTS: 1 REF: 19.7
28. GreenWorld Company wants to increase its ROI from 20 per cent to 25 per cent in the current year.
They cannot increase operating income and sales from the previous year's levels of £50,000 and
£1,200,000, respectively. To increase ROI, GreenWorld should
a. make additional investments of £25,000.
b. sell obsolete inventory for £10,000 and use the proceeds to pay off debts.
c. sell obsolete inventory for £50,000 and use the proceeds to pay off debts.
d. GreenWorld can't increase ROI.
ANS: C
ROI of 20%: £50,000/.20 = £200,000 in operating assets
ROI of 25%: £50,000/.25 = £250,000 in operating assets
Decrease in operating assets needed: £250,000 - £200,000 = £50,000
PTS: 1 REF: 19.7
29. The following information was extracted from the accounting records of Florissant Valley Motors:
Prior Year Current Year
Margin 6.0 5.0
Turnover 2.5 3.2
Florissant Valley's ROI for the current year is

a. greater than for the prior year due to the change in turnover.
b. greater than for the prior year due to the change in margin.
c. less than for the prior year due to the change in turnover.
d. less than for the prior year due to the change in margin.
ANS: A
Prior ROI = 6.0  2.5 = 15
Current ROI = 5.0  3.2 = 16
PTS: 1 REF: 19.7
Figure 19-2
The following results for the year pertain to the Northern Division of Garvey Ltd.:
Sales £400,000
Taxes 60,000
Operating income after taxes 160,000
30. Refer to Figure 19-2. Northern's total capital employed is £1,200,000, and their weighted average
cost of capital is 12 per cent. Economic value added for the Northern Division is
a. £240,000.
b. £144,000.
c. (£104,000).
d. £16,000.
ANS: D
£160,000 - (£1,200,000  12%) = £16,000
PTS: 1 REF: 19.9
31. Refer to Figure 19-2. If Northern's average operating assets are £1,200,000 and their minimum
required rate of return is 12 per cent, what is the Northern Division's return on investment?
a. 33.3%
b. 18.3%
c. 13.3%
d. 12.0%
ANS: B
(£160,000 + £60,000)/£1,200,000 = 18.3%
PTS: 1 REF: 19.7
Figure 19-3

12109722

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

12109722

Uploaded by

Copyright:

Available Formats

ANS: A PTS: 1 REF: 19.

21. The following information is provided:

Operating Average Operating

PTS: 1 REF: 19.7

22. The following information is provided:

Project Income Investment

PTS: 1 REF: 19.7

Project Income Investment

PTS: 1 REF: 19.7

Accept Projects B and C.

PTS: 1 REF: 19.7

PTS: 1 REF: 19.7

PTS: 1 REF: 19.7

PTS: 1 REF: 19.7

PTS: 1 REF: 19.7

Florissant Valley's ROI for the current year is

PTS: 1 REF: 19.7

PTS: 1 REF: 19.9

PTS: 1 REF: 19.7

You might also like