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23 August, 20:02

The current controllable margin for Henry Division is $138000. Its current operating assets are $300000. The division is considering purchasing equipment for $90000 that will increase annual controllable margin by an estimated $5000. If the equipment is purchased, what will happen to the return on investment for Henry Division

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  1. 23 August, 20:40
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    The correct answer is Decrease ROI by 9.33%.

    Explanation:

    According to the scenario, the computation of the given data are as follows:

    First we calculate return on investment before purchase:

    Return on investment = (Controllable Margin : Operating assets) * 100

    = ($138,000 : $300,000) * 100

    = 46%

    Controllable margin (New) = $138,000 + $5,000 = $143,000

    Operating assets = $300,000 + $90,000 = $390,000

    Return on investment (New) = ($143,000 : $390,000) * 100

    = 36.67%

    So, change in ROI = 36.67 % - 46%

    = - 9.33% (Negative shows decrease)

    Hence, Decrease ROI by 9.33%.
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