Parsa Incorporated reported the following results from last year's operations: At the beginning of this year, the company has a $1,100,000 investment opportunity with the following characteristics:
If the company pursues the investment opportunity and otherwise performs the same as last year, the combined return on investment for the entire company will be closest to:
A) 12.0%
B) 8.6%
C) 10.4%
D) 1.7%

Question

Parsa Incorporated reported the following results from last year's operations:  At the beginning of this year, the company has a $1,100,000 investment opportunity with the following characteristics:
 If the company pursues the investment opportunity and otherwise performs the same as last year, the combined return on investment for the entire company will be closest to:
A) 12.0% 
B) 8.6% 
C) 10.4% 
D) 1.7%

Quizplus · Accepted Answer

To calculate the combined return on investment for the entire company, we need to consider the return on investment from last year and the investment opportunity.

Return on investment (ROI) for last year: 
ROI = Net Income / Total Assets
ROI = $240,000 / $2,000,000
ROI = 0.12 or 12%

Return on investment (ROI) from the investment opportunity:
ROI = (Cash Inflow - Cash Outflow) / Cash Outflow
ROI = ($1,600,000 - $1,100,000) / $1,100,000
ROI = 0.45 or 45%

Since the investment opportunity has a higher ROI than last year's ROI, it would increase the overall ROI for the company. To calculate the combined ROI, we use the weighted average of the two ROIs:

Combined ROI = (Last year's ROI x Last year's assets + ROI from investment opportunity x Investment amount) / (Last year's assets + Investment amount)
Combined ROI = (0.12 x $2,000,000 + 0.45 x $1,100,000) / ($2,000,000 + $1,100,000)
Combined ROI = 0.104 or 10.4%

Therefore, the closest answer choice is C) 10.4%.

Parsa Incorporated Reported the Following Results from Last Year's Operations