Solutions to Quiz 2 a. Revenues 15000000- Production Cost 3000000- Payroll 2000000- Depreciation 6250000 ! This includes depreciation on sunk cost, since this acctg statement- Allocated Advertising 1375000 ! This is based on allocation, again because this is a income statemen Operating Income 2375000- Taxes 950000 Operating Income after taxes 1425000 b. Initial Investment = 30000000 ! Includes capitalized market testing expenses Ending Salvage Value = 5000000 ! Assumes market testing expenses are not amortized Average Book Value = 17500000 ! If market testing not capitalized, this will be 15,000,000 Return on Capital = 8.14% ! If market testing not capitalized, this would be 12% (If you ignore the sunk costs, the return on capital is 12%) Depending upon your definition of starting and ending book value, and whether you included working capital, the averages ranged from $ 13.5 million to $ 18 million. I gave full credit for all of the alternatives. c.
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