Ferreterias El Clavillazo is considering a promotional campaign that will increase annual credit sales by $450,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

Accounts Receivable Turnover

2

Plant & Equipment Turnover

1

Inventory Turnover

6

About 1% of the sales will be uncollectible. Collection costs will be 6 percent of sales, and production and selling costs will be 71 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 25 percent. The firm has a required return on investment of 7.9%, and the long-term interest rate is 11.5%.

What is the a) Return on Investment, and b) decision whether to undertake the promotional campaign described throughout this problem?

a) ROI = 6.86%; b) do not undertake promotional campaign

a) ROI = 7.8%; b) do not undertake promotional campaign

a) ROI = 17.15%; b) undertake promotional campaign

None of the above/below answers

a) ROI = 11.9%; b) undertake promotional campaign