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Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to...

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Accounting

Knitpix Products is a division of Parker Textiles Inc. Duringthe coming year, it expects to earn income Of $310,000 based onsales of $3.45 million; without any new investments, the divisionwill have average operating assets of $3 million. The division isconsidering a capital investment project—adding knitting machinesto produce gaiters— that requires an additional investment of$600,000 and increases net income by $57,500 (sales would increaseby $575,000). If made, the investment would increase beginningoperating assets by $600,000 and ending operating assets by$400,000.

Assume that the actual cost of capital for the company is 7percent.

Required:

  1. Compute the ROl for the division without the investment.
  1. Compute the margin and turnover ratios without the investment.Show that the product of the margin and turnover ratios equals theROI computed in Requirement 1.
  1. Compute the ROI for the division with the new investment. Doyou think the divisional manager will approve the investment?
  1. Compute the margin and turnover ratios for the division withthe new investment. Compare these with the old ratios.
  1. Compute the EVA of the division with and without theinvestment. Should the manager decide to make the knitting machineinvestment?

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