A clothing company would like to purchase a new piece of equipment and has been debating the purchase of either (a) a new sewing machine that would improve the existing department or (b) an embellisher that would afford the company the opportunity of adding new and unique clothing to their existing lines. They have gathered the following prospective information: What is the Return on Investment (ROI) for each choice?
A) Sewing Machine: 93.66%, Embellisher: 122.4%
B) Sewing Machine: 106.16%, Embellisher: 132.4%
C) Sewing Machine: 122.40%, Embellisher: 93.66%
D) Sewing Machine: 132.40%, Embellisher: 106.16%

Question

A clothing company would like to purchase a new piece of equipment and has been debating the purchase of either (a) a new sewing machine that would improve the existing department or (b) an embellisher that would afford the company the opportunity of adding new and unique clothing to their existing lines. They have gathered the following prospective information:  What is the Return on Investment (ROI) for each choice?
A) Sewing Machine: 93.66%, Embellisher: 122.4% 
B) Sewing Machine: 106.16%, Embellisher: 132.4% 
C) Sewing Machine: 122.40%, Embellisher: 93.66% 
D) Sewing Machine: 132.40%, Embellisher: 106.16%

Quizplus · Accepted Answer

This question requires the formula for calculating Return on Investment: Operating Income divided by Investment. The operating expenses for each are incomplete, so calculate the depreciation expense. Sewing Machine: $3,420/10 years = $342 per year. Total operating expenses = $902 + $342 = $1,244. Embellisher: $4,808/8 years = $601 per year. Total operating expenses = $1,176 + $601 = $1,777. Now, calculate ROI for each. Sewing Machine: ($5,430 - $1,244)/$3,420 = 1.2240 or 122.40%. Embellisher: ($6,280 - $1,777)/$4,808 = 0.9366 or 93.66% (Choice C).

A Clothing Company Would Like to Purchase a New Piece