Sarah Jones, the manager of the Teen Division of Ellen Clothing Company, was evaluating the acquisition of a new embroidery machine. The budgeted operating income of the Teen Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000. The proposed investment would add $450,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the Teen Division is 14%. Ignoring taxes, how much is the return on investment of the Teen division if the embroidery machine is purchased?

Answer

Sarah Jones, the manager of the Teen Division of Ellen Clothing Company, was evaluating the acquisition of a new embroidery machine. The budgeted operating income of the Teen Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000. The proposed investment would add $450,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the Teen Division is 14%. Ignoring taxes, how much is the return on investment of the Teen division if the embroidery machine is purchased?

Answer