problem 10 - 1

PROBLEM 10 - 1 Mark, division manager of Fila Company, was debating the merits of a new product- "Yeezy Shoes". The budgeted income of the division was $600,000 with average operating assets of $4,200,000. The proposed investment would add income of $550,000 and would require an additional investment in equipment of $3,000,000. The minimum required return on investment for the company is 6 percent. Their actual cost of capital is 8 percent. The income tax rate in the country is 15%. Round all numbers to two decimal places. Required: 1. Compute the ROI of the a. Division if the "Yeezy Shoes" project is not undertaken. b. "Yeezy Shoes" project alone. c. Division if the "Yeezy Shoes" project is undertaken. 2. Compute the residual income of the: a. Division if the "Yeezy Shoes" project is not undertaken. b. White "Yeezy Shoes" alone. c. Division if the "Yeezy Shoes" project is undertaken. 3. Calculate the EVA for Fila if the "Yeezy Shoes" project is undertaken and if the "Yeezy Shoes" project is not undertaken. 4. Do you suppose that Mark will decide to invest in the new "Yeezy Shoes"? Why or why not