Superstitch Products is a division of Robinson 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
project - adding knitting machines to produce gaiters - that requires an additional investment
of $600,000 and increases net income by $57,500 (sales would increase by $575,000). If made,
the investment would increase beginning operating assets by $600,000 and ending operating
assets by $400,000. Assume that the actual cost of capital for the company is 7%.
(Round all answers to four decimal places).
Part One: Compute the ROI for the division without the investment.
Current ROI of the Division:
Current Operating Income
Current Investment Base
ROI
Part Two: 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.
Margin
Turnover
ROI