Hardcastle Ltd. had sales of $3,600,000 and net operating income of $900,000. Operating assets during the year averaged $1,500,000. The manager of Hardcastle is considering the purchase of a new machine which is expected to increase average operating assets by 20%. If the new machine is purchased, the company's new return on investment (ROI) would be:
A) 190.5%
B) 60.0%
C) 200.0%
D) 50.0%

Question

Quizplus · Accepted Answer

Current ROI = Net Operating Income / Avg. Operating Assets = 900,000 / 1,500,000 = 60%
New operating assets after the purchase of the machine = 1,500,000 * 1.2 = $1,800,000
New net operating income = $3,600,000 * 0.25 = $900,000 (since ROI = Net Operating Income / Avg. Operating Assets)
New ROI = 900,000 / 1,800,000 = 50% 
Therefore, the answer is D as the new ROI would be 50.0%.