Global Electronics Company The Computer Division of Global Electronics Company had the following financial data for the year:
Refer to Global Electronics Company. If the manager of the Computer Division is evaluated based on return on investment, how much would she be willing to pay for an investment that promises to increase net segment income by $50,000?
A) $ 50,000
B) $ 333,333
C) $1,000,000
D) $ 500,000

Question

Global Electronics Company The Computer Division of Global Electronics Company had the following financial data for the year:
 Refer to Global Electronics Company. If the manager of the Computer Division is evaluated based on return on investment, how much would she be willing to pay for an investment that promises to increase net segment income by $50,000?
A) $ 50,000 
B) $ 333,333 
C) $1,000,000 
D) $ 500,000

Quizplus · Accepted Answer

The manager of the Computer Division would be willing to pay an amount that would result in an ROI greater than the current ROI. To calculate the current ROI, we divide the net segment income of $1,050,000 by the average total assets of $7,500,000, which gives us an ROI of 14%.

To achieve an ROI of 15%, the net segment income would need to increase by $75,000 (since 15% of $7,500,000 is $1,125,000). Therefore, the manager would be willing to pay up to $50,000 for an investment that promises to increase net segment income by $50,000, since this would result in an ROI of 14.67% ($1,100,000 net segment income divided by $7,500,000 average total assets).

However, if the investment could guarantee an increase in net segment income of $75,000, the manager would be willing to pay up to $333,333 to achieve an ROI of 15%. Therefore, the best choice is B.

Global Electronics Company the Computer Division of Global Electronics Company