60.1K

Verified Solution

Link Copied!

Simmons Company is a merchandiser with multiple store locations. One of its store managers is considering a shift in her stores product mix in anticipation of a strengthening economy. Her store would invest $800,000 in more expensive merchandise (an increase in its working capital) with the expectation that it would increase annual sales and variable expenses by $400,000 and $250,000, respectively for three years. At the end of the three-year period, the store manager believes that the economic surge will subside; therefore, she will release the additional investment in working capital. The store managers pay raises are largely determined by her stores return on investment (ROI), which has exceeded 22% each of the last three years.

Click here to view Exhibit 13B-1 to determine the appropriate discount factor(s) using table.

Required:

2. Calculate the annual margin, turnover, and return on investment (ROI) provided by the store managers investment opportunity for years 1, 2 & 3

	Year 1 Year 2 Year 3 Margin % % % Turnover Return on investment % % %

3. Assuming that the companys minimum required rate of return is 16%, calculate the residual income earned by the store managers investment opportunity for each of years 1 through 3.

	Year 1 Year 2 Year 3 Residual income

4. Do you think the store manager would choose to pursue this investment opportunity? Do you think the company would want the store manager to pursue it?

Do you think the store manager would choose to pursue this investment opportunity? Do you think the company would want the store manager to pursue it?

	Do you think the store manager would choose to pursue this investment opportunity? Yes No Do you think the company would want the store manager to pursue it? Yes No

Answer & Explanation Solved by verified expert

See Answer