(ROI and RI) Magna Products has three divisions, A, B, and C. The current investments in and net profits earned by each division are as follows:
|
Division A |
|
|
Investment |
$1,000,000 |
|
Net profit |
$75,000 |
|
Division B |
|
|
Investment |
$1,500,000 |
|
Net profit |
$90,000 |
|
Division C |
|
|
Investment |
$2,000,000 |
|
Net profit |
$150,000 |
Each division has put forward to the parent board a capital expenditure proposal for $500,000. Each expects to produce net profits of $40,000 from that investment. Magna’s cost of capital is 7% per year.
Use ROI and RI calculations to
- Evaluate the current performance of each division.
- Evaluate which proposal the board should approve if finance limits the decision to a single proposal.