The Media Division of Winslow Company has invested capital of $1,250,000, sales of $590,000, net income of $44,250, and interest expense of $7,000.Winslow's income tax rate is 40 percent.What is the Media Division's return on investment?
A)3.76%
B)3.88%
C)0.47%
D)-3.76%

Question

Quizplus · Accepted Answer

Return on investment (ROI) is calculated by dividing the net income (income after interest and taxes) by the invested capital.

ROI = (Net income - Interest expense) / Invested capital

ROI = ($44,250 - $7,000) / $1,250,000
ROI = 3.4%

However, this is before considering income taxes. After applying the income tax rate of 40%, the ROI becomes:

ROI = ($44,250 - $7,000) x (1-0.4) / $1,250,000
ROI = $37,650 x 0.6 / $1,250,000
ROI = 0.018 or 1.8%

Therefore, the correct answer is B) 3.88% (rounded to two decimal places).

The Media Division of Winslow Company Has Invested Capital of $1,250,000