Question

For the year 2019, the specialty chemicals division of Freemont and Co., had an asset turnover ratio of 2, return on sales of 20% and total revenues of $600 million. The required rate of return used for residual income calculation by Freemont and Co., is 20%.

Assume that the division has identified a new investment opportunity requiring an investment of $200 million that would yield an additional income of $70 million. If the chemicals division invests in the new project, its overall ROI will be

		13.57%
		36%
		23%
		40%
		38%
		46%

Answer 1

Answer:

Overall ROI is 38%.

Explanation:

Asset Turnover = Net sale / Avearge Operating asset

2 = $600 million / Average operating Asset

Average operating Asset = $600 million / 2 = $300 million

Return on sale = Sales Revenue x Profit margin

= $600 million x 20%

= $120 Million

Now,

New operating asset = $300 million + $200 million = $500 million

New Operating Income = $120 million + $70 Million = $190 Million

Return on investment = (New Operating Income / New operating asset) x 100

= ($190 million / $500 million) x 100

= 38%