Question #3 Consider the following information about a potential project: Invest
ID: 2424505 • Letter: Q
Question
Question #3
Consider the following information about a potential project:
Investment required
$15,000,000
Expected annual project revenue
$17,000,000
Expected annual project expenses
$14,500,000
Required rate of return
15%
Current division return on investment
19%
a) Calculate the project’s return on investment.
b) Based solely on ROI, is this project in the firm’s best interests? Why or why not?
c) Is this project in the division manager’s best interests? Why or why not?
d) Perform DuPont Analysis on this project.
e) What is the project’s residual income?
Investment required
$15,000,000
Expected annual project revenue
$17,000,000
Expected annual project expenses
$14,500,000
Required rate of return
15%
Current division return on investment
19%
Explanation / Answer
Investment required $15,000,000 Expected annual project revenue $17,000,000 Expected annual project expenses $14,500,000 Profit $2,500,000 Required rate of return 15% Current division return on investment 19% a) Calculate the project’s return on investment. 16.67% (profit/investment) b) Based solely on ROI, is this project in the firm’s best interests? Why or why not? as the rate of return is better than the required rate of return project is in firms best interest c) Is this project in the division manager’s best interests? Why or why not? No. as the divisional return is greater. d) Perform DuPont Analysis on this project. DuPont Analysis ROE = Profit Margin (Profit/Sales) * Total Asset Turnover 14.71% e) What is the project’s residual income? actual profit $2,500,000 required return $2,250,000 residual income $250,000