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Two different business units of Tamarisk Corporation were engaged in a friendly competition to see which location would make the best use of a $49,000
Two different business units of Tamarisk Corporation were engaged in a friendly competition to see which location would make the best use of a $49,000 investment. The business units had complete autonomy to spend the money on whatever investment would best serve their locations, but they were motivated to keep ROI trends moving in a positive direction. The following financial statements reflect each business unit's profitability and financial position at the end of the prior calendar year. Tamarisk Corporation uses a 7% minimum required rate of return. It is financed 70% with debt that carries an average 6% interest rate, and it averages an 8% cost of equity. Each location is considering one of the following two investments in long-term assets, where the asset would be depreciated using the straight-line method over its useful life. 1. $49,000 for an updated and upgraded pizza oven that will allow for faster cooking times and less energy usage, with an estimated improvement in operating income of $16,000 each year (before depreciation) over its 7-year life. 2. $49,000 to update the atmosphere and seating capacity of the restaurant, with an anticipated operating income increase of $11,000 per year (before depreciation) over a 10 -year useful life, when it will be updated again. (a) Calculate each location's ROI for last year, using total operating assets as the denominator. Here, all assets except long-term investments are considered operating assets. (Round answers to 4 decimal places, e.g. 0.1526 \)
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