A company with an ROIC of 45 percent and a cost of capital of 8 percent is considering an investment opportunity of similar risk to its existing investments.If the new opportunity would generate a 30 percent ROIC,what should the company do?
A)The company should invest in this project,as 30 percent is pretty close to the 45 percent that the company currently achieves.
B)The company should not invest in the project,since the return is lower than its current return of 45 percent.
C)The company should invest in the project,as its return is greater than the cost of capital.
D)The company should not invest in the project,since it already enjoys a high ROIC and the new investment will dilute the overall returns.

Question

Quizplus · Accepted Answer

The company should invest in the project as it generates a greater return than the cost of capital. Despite the fact that the return is lower than the current ROIC of 45%, it is still a solid return above the cost of capital, which means the investment will be beneficial for the company. Option A is not valid since a 30 percent return is significantly lower than a 45 percent return. Option B is incorrect because the return is greater than the cost of capital. Option D is also incorrect because a new investment opportunity, if successful, can increase overall returns.

A Company with an ROIC of 45 Percent and a Cost