1. #2

2. Return on Investment and Economic Value Added Calculations with Varying Assumptions

   Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to earn income of $310,000 based on sales of $3.45 million. Without any new investments, the division will have average operating assets of $3 million. The division is considering a capital investment projectadding knitting machines to produce gaitersthat requires an additional investment of $650,000 and increases net income by $57,500 (sales would increase by $575,000). If made, the investment would increase beginning operating assets by $650,000 and ending operating assets by $450,000. Assume that the actual cost of capital for the company is 7%.

   Required:

   1. Compute the ROI for the division without the investment. Round your answer to two decimal places. fill in the blank 1 %

   2. Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1. Round your answers to two decimal places.

   Margin	fill in the blank 2 %
   Turnover	fill in the blank 3
   ROI	fill in the blank 4 %

   3. Conceptual Connection: Compute the ROI for the division with the new investment. Round your answer to one decimal place. fill in the blank 5 %

   Do you think the divisional manager will approve the investment?

   Because ROI with the investment is larger than ROI without it, the manager will approve the investment.Because ROI with the investment is larger than ROI without it, the manager will disapprove the investment.Because ROI with the investment is smaller than ROI without it, the manager will approve the investment.Because ROI with the investment is smaller than ROI without it, the manager will disapprove the investment.

   4. Conceptual Connection: Compute the margin and turnover ratios for the division with the new investment. Round your answers to two decimal places. How do these compare with the old ratios?

   Margin	fill in the blank 7 %	The ratio value increasedThe ratio value decreasedThe ratio value stayed the same
   Turnover	fill in the blank 9	The ratio value increasedThe ratio value decreasedThe ratio value stayed the same

   5. Conceptual Connection: Compute the EVA of the division with and without the investment.

   EVA without the investment	$fill in the blank 11
   EVA with the investment	$fill in the blank 12

   Should the manager decide to make the knitting machine investment?

   EVA has increased with the investment, so the manager would approve the investment.EVA has increased with the investment, so the manager would disapprove the investment.EVA has decreased with the investment, so the manager would approve the investment.EVA has decreased with the investment, so the manager would disapprove the investment.