Align Division is one of the divisions of DynaCore.Align's invested capital is $420,000.Last year, Align generated NOPAT of $64,260 on sales of $756,000.Which one of the following correctly calculates Align Division's return on investment using the two components of return on investment?
A)$64,260 ÷ $756,000
B)11.76% × 0.56
C)$4,260 ÷ $756,000
D)8.5% × 1.80

Question

Quizplus · Accepted Answer

The formula for return on investment (ROI) is:

ROI = (Net Operating Profit After Taxes / Invested Capital) x 100

Using the numbers provided in the question:

ROI = (64,260 / 420,000) x 100

ROI = 15.3%

The two components of ROI are the net operating profit after taxes (NOPAT) and the invested capital. Therefore, we need to use both components in the calculation.

Option A only uses NOPAT and sales, but we need to divide NOPAT by invested capital to get the return on investment.

Option B multiplies two arbitrary numbers that do not relate to the problem.

Option C uses the wrong number for NOPAT and still does not consider invested capital.

Option D correctly uses the formula for ROI by multiplying the NOPAT margin (NOPAT / sales) and the asset turnover ratio (sales / invested capital), resulting in a calculation of:

ROI = (64,260 / 756,000) x (756,000 / 420,000) x 100

ROI = 8.5% x 1.8

ROI = 15.3%

Align Division Is One of the Divisions of DynaCore