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

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11-1Return on Investment (ROI) FormulaROI =Net operating incomeAverage operating assetsCash, accounts receivable, inventory,plant and equipment, and otherproductive assets.Cash, accounts receivable, inventory,plant and equipment, and otherproductive assets.Income before interestand taxes (EBIT)Income before interestand taxes (EBIT)
11-2Net Book Value versus Gross CostMost companies use the net book value ofdepreciable assets to calculate averageoperating assets.Acquisition costLess: Accumulated depreciationNet book value
11-3Understanding ROIMargin =Net operating incomeSalesTurnover =SalesAverage operatingassetsROI =MarginTurnover
11-4Increasing 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?=
11-5Increasing ROI – An Example\$30,000\$500,000×\$500,000\$200,000ROI=6%2.5 = 15%ROI=ROI =MarginTurnoverNet operating incomeSalesSalesAverage operating assets×ROI=
11-6Investing in Operating Assets toIncrease SalesAssume that Regal's manager invests in a \$30,000piece of equipment that increases sales by\$35,000, while increasing operating expensesby \$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
11-7Investing in Operating Assets toIncrease Sales\$50,000\$535,000×\$535,000\$230,000ROI=9.35%2.33 = 21.8%ROI=ROI increased from 15% to 21.8%.ROI increased from 15% to 21.8%.ROI =MarginTurnoverNet operating incomeSalesSalesAverage operating assets×ROI=
11-8Criticisms of ROIIn the absence of the balancedscorecard, management maynot know how to increase ROI.Managers often inherit manycommitted costs over whichthey have no control.Managers evaluated on ROImay reject profitableinvestment opportunities.
11-9Residual Income - Another Measure ofPerformanceNet operating incomeabove some minimumreturn on operatingassets
11-10Calculating Residual IncomeResidualincome=Netoperatingincome-AverageoperatingassetsMinimumrequired rate ofreturn()This computation differs from ROI.ROI measures net operating income earned relativeto the investment in average operating assets.Residual income measures net operating incomeearned less the minimum required return on averageoperating assets.

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Term
Fall
Professor
Pfeiffer
Tags
Redmond Awnings, Wrap up Corp