Robichau Incorporated reported the following results from last year's operations: At the beginning of this year, the company has a $900,000 investment opportunity with the following characteristics:
The company's minimum required rate of return is 20%.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) 3.9%
B) 24.0%
C) 14.5%
D) 18.5%

Question

Robichau Incorporated reported the following results from last year's operations:  At the beginning of this year, the company has a $900,000 investment opportunity with the following characteristics:
 The company's minimum required rate of return is 20%.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) 3.9% 
B) 24.0% 
C) 14.5% 
D) 18.5%

Quizplus · Accepted Answer

To calculate the combined return on investment for the entire company, we need to calculate the net income from both operations and divide it by the total investment.

The net income from last year's operations is $700,000, calculated as follows:
Revenue - Expenses = Net Income
$5,000,000 - $4,300,000 = $700,000

To calculate the net income from the new investment opportunity, we need to calculate the present value of the future cash inflows and compare it to the initial investment. Using a financial calculator, we get:

PV of cash inflows = $300,000 ÷ 1.20 + $400,000 ÷ 1.44 + $500,000 ÷ 1.728 
PV of cash inflows = $250,000 + $277,778 + $289,352 
PV of cash inflows = $817,130

Since the investment opportunity requires an initial investment of $900,000, it does not meet the minimum required rate of return of 20%. Therefore, the company should not pursue this opportunity.

Thus, the combined return on investment for the entire company will only be from last year's operations, which is $700,000 net income divided by a total investment of $4,000,000 (last year's assets). Therefore, the combined return on investment for the entire company will be:
$700,000 ÷ $4,000,000 = 0.175, or 17.5%, which is closest to answer choice D (18.5%).

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