Last year, Processor Division of Mathews PC Company earned NOPAT of $200,000 on sales of $2,600,000.The division had invested capital of $1,600,000 with $62,000 of noninterest-bearing current liabilities.How much is the division's return on investment?
A)12.5%
B)13.0%
C)7.7%
D)61.5%

Question

Quizplus · Accepted Answer

The division's return on investment (ROI) is calculated by dividing the NOPAT by the invested capital. The invested capital is the total capital minus noninterest-bearing current liabilities, which is $1,600,000 - $62,000 = $1,538,000. The ROI is then $200,000 / $1,538,000 = 0.13 or 13%. However, since the noninterest-bearing current liabilities are subtracted from the total capital to find the invested capital, the correct calculation should not subtract these liabilities, making the invested capital actually $1,600,000. Thus, the ROI is $200,000 / $1,600,000 = 0.125 or 12.5%.

Last Year, Processor Division of Mathews PC Company Earned NOPAT