Question

Paula Boothe, president of the Blue Corporation, has mandated a minimum 10% return on investment for any project undertaken by the company. Given the company’s decentralization, Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 10%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 14% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,800,000 in a new line of energy drinks that is expected to generate $203,000 in operating income.

a. Calculate the return on investment expected on the new line of energy drinks. (Round answer to 1 decimal place, e.g. 5.1%.)

Answer 1

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.

Computation of ROI

ROI = Net operating Income/ Average Asset Employed

Particulars		New line of energy drinks
Net Operating Income	A	$203,000.00
Average Assets Employed	B	$1,800,000.00
ROI	C=A/B	11.3%