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Ferreterias El Clavillazo is considering a promotional campaign that will increase annual credit sales by...

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Accounting

Ferreterias El Clavillazo is considering a promotional campaign that will increase annual credit sales by $450,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:
Accounts Receivable Turnover
2
Plant & Equipment Turnover
1
Inventory Turnover
6
About 1% of the sales will be uncollectible. Collection costs will be 6 percent of sales, and production and selling costs will be 71 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 30 percent. The firm has a required return on investment of 7.5%, and the long-term interest rate is 6.5%.
What is the a) Return on Investment, and b) decision whether to undertake the promotional campaign described throughout this problem?
Multiple Choice
a) ROI =13.88%; b) undertake promotional campaign
a) ROI =6.86%; b) do not undertake promotional campaign
None of the above/below answers
a) ROI =7.28%; b) do not undertake promotional campaign
a) ROI =17.15%; b) undertake promotional campaign

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