Le Sud Retailers has a current return on investment of 10% and the company has established an 8% minimum rate of return for the division. The division manager has two investment projects available for which the following estimates have been made:
Project A - Annual controllable margin = $24000 operating assets = $400000
Project B - Annual controllable margin = $60000 operating assets = $550000
Which project should be funded?
A) Both projects
B) Project A
C) Project B
D) Neither project

Question

Le Sud Retailers has a current return on investment of 10% and the company has established an 8% minimum rate of return for the division. The division manager has two investment projects available for which the following estimates have been made: 
Project A - Annual controllable margin = $24000 operating assets = $400000
Project B - Annual controllable margin = $60000 operating assets = $550000
Which project should be funded?
A) Both projects
B) Project A
C) Project B
D) Neither project

Quizplus · Accepted Answer

To determine which project to fund, we need to calculate the return on investment (ROI) for each project:

ROI A = Controllable Margin / Operating Assets = $24,000 / $400,000 = 0.06 = 6%
ROI B = Controllable Margin / Operating Assets = $60,000 / $550,000 = 0.109 = 10.9%

Since the minimum rate of return for the division is 8%, Project B has a higher ROI and should be funded. Project A does not meet the minimum rate of return and should not be funded. Therefore, the best choice is to fund Project B only.

Le Sud Retailers Has a Current Return on Investment of 10