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Knitpix Products is a division of Parker Textiles Inc

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Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to earn income Of $310,000 based on sales of $3.45 million; without any new investments, the division will have average operating assets of $3 million. The division is considering a capital investment project—adding knitting machines to produce gaiters— that requires an additional investment of $600,000 and increases net income by $57,500 (sales would increase by $575,000). If made, the investment would increase beginning operating assets by $600,000 and ending operating assets by $400,000.

 

Assume that the actual cost of capital for the company is 7 percent.

 

Required:

 

  • Compute the ROl for the division without the investment.

 

  • Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1.

 

  • Compute the ROI for the division with the new investment. Do you think the divisional manager will approve the investment?

 

  • Compute the margin and turnover ratios for the division with the new investment. Compare these with the old ratios.

 

  • Compute the EVA of the division with and without the investment. Should the manager decide to make the knitting machine investment?

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