1) For 2012, an investment center of Lawson Company reported operating income of
$420,000 on total operating assets of $2,600,000. The company has established a target
ROI of 14% for the investment center. Last year, the investment center’s ROI was
11.9%.
Required:
Calculate the 2012 return on investment for the investment center. Compare its
performance for 2012 with both the performance from the previous year and the target
ROI.
2) How does a company estimate the minimum rate of return needed from its capital
investments?
3) How is return on investment calculated? What are operating assets? Why are
operating assets used in calculating return on investment, rather than all assets?
4) A capital investment is expected to cost $100,000, have a useful life of 5 years, and
provide annual cash inflows of $26,000. How would you determine whether or not the
project is an acceptable investment?
5) Natahala Company is considering the purchase of new equipment that will cost
$125,000. The equipment will save the company $42,000 per year in cash operating
costs. The equipment has an estimated useful life of five years and no expected salvage
value. The company’s cost of capital is 12%.
Required:
1) Ignoring income taxes compute the net present value and internal rate of return.
2) Should the equipment be purchased? Why or why not?
6) Schultz Corporation purchased equipment on January 2, 2012 for $50,000. Schultz
used the straight-line method of depreciation with a $5,000 salvage value and a useful
life of 5 years. On January 1, 2014 Schultz sold this equipment for $26,000.
Required:
Calculate the book value of the equipment on January 1, 2010 and the gain or loss
Schultz should recognize from this sale.
