Problem 15-23 Return on investment
Soto Corporation’s balance sheet indicates that the company has $300,000 invested in operating assets. During 2011, Soto earned operating income of $45,000 on $600,000 of sales.
Required
a. Compute Soto’s profit margin for 2011.
b. Compute Soto’s turnover for 2011.
c. Compute Soto’s return on investment for 2011.
d. Recompute Soto’s ROI under each of the following independent assumptions.
(1) Sales increase for $600,000 to $750,000, thereby resulting in an increase in
operating income for $45,000 to $60,000.
(2) Sales remain constant, but Soto reduces expenses resulting in an increase in
operating income from $45,000 to $48,000.
(3) Soto is able to reduce its invested capital from $300,000 to $240,000 without
affecting operating income.
Problem 16-23 Postaudit evaluation
Ernest Jones is reviewing his company’s investment in a cement plant. The company paid $15,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company’s discount rate for present value computations is 8 percent. Expected and actual cash flows follow.
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Expected | $3,300,000 | $4,920,000 | $4,560,000 | $4,980,000 | $4,200,000 |
Actual | 2,700,000 | 3,060,000 | 4,920,000 | 3,900,000 | 3,600,000 |
Required
a. Compute the net present value of the expected cash flows as of the beginning of the
investment.
b. Compute the net present value of the actual cash flows as of the beginning of the
investment.
c. What do you conclude from this postaudit?
Problem 15-23 Return on investment
Soto Corporation’s balance sheet indicates that the company has $300,000 invested in operating assets. During 2011, Soto earned operating income of $45,000 on $600,000 of sales.
Required
a. Compute Soto’s profit margin for 2011.
b. Compute Soto’s turnover for 2011.
c. Compute Soto’s return on investment for 2011.
d. Recompute Soto’s ROI under each of the following independent assumptions.
(1) Sales increase for $600,000 to $750,000, thereby resulting in an increase in
operating income for $45,000 to $60,000.
(2) Sales remain constant, but Soto reduces expenses resulting in an increase in
operating income from $45,000 to $48,000.
(3) Soto is able to reduce its invested capital from $300,000 to $240,000 without
affecting operating income.
Problem 16-23 Postaudit evaluation
Ernest Jones is reviewing his company’s investment in a cement plant. The company paid $15,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company’s discount rate for present value computations is 8 percent. Expected and actual cash flows follow.
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Expected | $3,300,000 | $4,920,000 | $4,560,000 | $4,980,000 | $4,200,000 |
Actual | 2,700,000 | 3,060,000 | 4,920,000 | 3,900,000 | 3,600,000 |
Required
a. Compute the net present value of the expected cash flows as of the beginning of the
investment.
b. Compute the net present value of the actual cash flows as of the beginning of the
investment.
c. What do you conclude from this postaudit?