clicker slides chap 11.ppt - 11-1 Return on Investment(ROI Formula Income Incomebefore before interest interest and andtaxes taxes(EBIT(EBIT Net

# clicker slides chap 11.ppt - 11-1 Return on Investment(ROI...

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11-1 Return on Investment (ROI) Formula ROI = Net operating income Average operating assets Cash, accounts receivable, inventory, plant and equipment, and other productive assets. Cash, accounts receivable, inventory, plant and equipment, and other productive assets. Income before interest and taxes (EBIT) Income before interest and taxes (EBIT)
11-2 Net Book Value versus Gross Cost Most companies use the net book value of depreciable assets to calculate average operating assets. Acquisition cost Less: Accumulated depreciation Net book value
11-3 Understanding ROI Margin = Net operating income Sales Turnover = Sales Average operating assets ROI = Margin Turnover
11-4 Increasing ROI – An ExampleRegal Company reports the following:Net operating income \$ 30,000Average operating assets \$ 200,000Sales \$ 500,000Operating expenses \$ 470,000What is Regal Company’s ROI? =
11-5 Increasing ROI – An Example \$30,000 \$500,000 × \$500,000 \$200,000 ROI = 6% 2.5 = 15% ROI = ROI = Margin Turnover Net operating income Sales Sales Average operating assets × ROI =
11-6Investing in Operating Assets to Increase SalesAssume that Regal's manager invests in a \$30,000 piece of equipment that increases sales by \$35,000, while increasing operating expenses by \$15,000. Let’s calculate the new ROI.Regal Company reports the following:Net operating income \$ 50,000Average operating assets \$ 230,000Sales \$ 535,000Operating expenses \$ 485,000
11-7 Investing in Operating Assets to Increase Sales \$50,000 \$535,000 × \$535,000 \$230,000 ROI = 9.35% 2.33 = 21.8% ROI = ROI increased from 15% to 21.8%. ROI increased from 15% to 21.8%. ROI = Margin Turnover Net operating income Sales Sales Average operating assets × ROI =
11-8 Criticisms of ROI
11-9 Residual Income - Another Measure of Performance Net operating income above some minimum return on operating assets
11-10 Calculating Residual Income Residual income = Net operating income - Average operating assets Minimum required rate of return ( ) This computation differs from ROI. ROI measures net operating income earned relative to the investment in average operating assets. Residual income measures net operating income earned less the minimum required return on average operating assets.