Knitpix Products is a division of Parker Textiles Inc. Duringthe coming year, it expects to earn income Of $310,000 based onsales of $3.45 million; without any new investments, the divisionwill have average operating assets of $3 million. The division isconsidering a capital investment project—adding knitting machinesto produce gaiters— that requires an additional investment of$600,000 and increases net income by $57,500 (sales would increaseby $575,000). If made, the investment would increase beginningoperating assets by $600,000 and ending operating assets by$400,000.
Assume that the actual cost of capital for the company is 7percent.
Required:
- Compute the ROl for the division without the investment.
- Compute the margin and turnover ratios without the investment.Show that the product of the margin and turnover ratios equals theROI computed in Requirement 1.
- Compute the ROI for the division with the new investment. Doyou think the divisional manager will approve the investment?
- Compute the margin and turnover ratios for the division withthe new investment. Compare these with the old ratios.
- Compute the EVA of the division with and without theinvestment. Should the manager decide to make the knitting machineinvestment?
